Housing's Wal-Mart Effect

"Bargain Bin" Sales, or,
Housing's Wal-Mart Effect

'Home Resales Rise as Prices Fall' --The Wall Street Journal (10/26/08)

Call it the housing market's version of the Wal-Mart effect: as consumers get pinched by a weakening economy, the goods still selling are value-priced staples.

In many housing markets nationally, sales numbers are being skewed by all the purchases being made from the "bargain bin": foreclosed or short sale homes, in poor condition, selling at deep discounts. In especially stressed markets like Florida, Nevada, and Arizona, that percentage apparently is now 40% or more (locally, the number is about half that).

While this phenomenon isn't exactly reason to celebrate, it's not as dire as analysts are making out, for two reasons.

Parsing the Numbers

One. Homes are not commodities. When consumers switch from $4.29 gallons of milk at Lund's and Byerly's (upscale Twin Cities grocers) to $2.29 gallons at Sam's Club, economists might argue, with some justification, that the "average price of milk is plummeting."

By contrast, what does it mean for homeowners in Linden Hills, Country Club, or Tyrol Hills -- all coveted, stable Twin Cities neighborhoods -- when "garbage-y" foreclosures fetch $50k or $75k in tougher parts of town? Very little.

Two. Housing prices are soft because there's too much supply, and foreclosures count as supply. Ergo, soaking up foreclosures is good for the overall market.

If anything, that understates the benefit of a foreclosure sale.

Foreclosures are to the housing market what gangrene is to the body: diseased cells that can spread to and kill healthy ones. Moving a vacant and deteriorating foreclosure from bank-owned hands into a homeowner's arrests that spread.