By David Roeder

August 1, 2010

That house down the street that just went into foreclosure wasn’t just bad for your neighbor. It’s gnawing at the value of your own home.

Sales figures show that foreclosed homes generally trade for a 40 percent discount compared with homes sold the conventional way in the same market. In many cases, the discount is far more.

Michael Walsh of Elmwood Park’s Citywide Services, an appraiser, said some banks that have held foreclosed homes drastically undercut the market when they finally let go. “They want to get whatever will get rid of the property in 60 days,” he said.

His trade calls for finding “comparable sales” in a given neighborhood, and he said that’s no easy task when there’s a preponderance of bank-owned real estate, called REOs, or short sales.

When a lender lets a homeowner sell for less than what he owes on the mortgage, that’s a short sale. It’s a step up from a foreclosure, with the difference being that in a short sale, the home is still occupied and presumably in better shape.

He sees different issues depending on location. In formerly hot city enclaves, anyone selling a home the conventional way “is competing with a lot of short sales and REOs, many of them recently rehabbed,” he said. A hike in foreclosures on the Near North Side, for example, shows more upscale condos with bad loans.

Walsh said he has done work around Marquette Park on the city’s Southwest Side lately, where “prices are still declining because it’s just the huge supply.”

Foreclosures have been an influence in the market since housing nationwide began falling in 2007. In some suburbs and Chicago neighborhoods, foreclosures now define the market.

“It’s very strong downward pressure on pricing,” said Geoffrey Hewings, an economics professor at the University of Illinois at Urbana-Champaign who analyzes sales data for the Illinois Association of Realtors. “It’s happening particularly in sort of midrange housing, where you have a lot of it for sale and the buyer has choices.”

Experts said a foreclosure or two in the neighborhood means a small cut in the asking price. More than that means trouble, they said.

“Three foreclosures on the block, and you have to have an honest discussion with the seller,” said broker Mabel Guzman of Century 21 S.G.R. Inc. Renting out the home or a short sale might be better alternatives, she said.

The trend has Realtors, appraisers and tax assessors scratching their heads to figure out where home valuations really stand. Experts said foreclosures are dictating market values in lower-income suburbs such as Carpentersville or Maywood, and in city neighborhoods such as Austin or around Garfield Park.

The latest data show foreclosures are moving outward from Cook County and higher on the demographic scale. Chicago’s Woodstock Institute said that for the first half of 2010, foreclosure filings in the six-county Chicago area were up 37 percent from the same period of 2009.

But the largest increases were in the five collar counties, where the filings were up by between 50 percent and 75 percent. Cook County filings rose 25 percent, Woodstock said.

The group’s report, and sales data from RealtyTrac Inc., show middle-class regions becoming foreclosure hotbeds. Examples include Ashburn and West Ridge in the city, and suburbs such as Bolingbrook and Schaumburg.

Now some experts are predicting a second wave of foreclosures, potentially worse than the first one in 2008-09. Many believe it will wash over the valuations of all homes and send prices, already off by about 30 percent from their 2006 peak, deeper into the muck. “It’s getting worse. In a lot of places, [asking] prices are still too high,” said Walsh, the appraiser.

“It seems to have shifted away from where the subprime loans got all the attention,” said Daren Blomquist, RealtyTrac’s marketing director. “The problem has shifted more to the prime loans,” which are made to borrowers thought to have good credit histories and incomes that can support the mortgage. Many borrowers overextended themselves, often with lenders helping them fudge their qualifications when credit was easy to get. As the recession dragged on, borrowers lost their jobs or saw their incomes reduced.

How much further prices will falter could depend on the volume of foreclosed homes lenders are holding, hoping things will stabilize. “The scary thing is that for every foreclosure out there, there might be another one the banks are holding,” said Mark Ruda, a broker and appraiser trainee who works mostly in the northwest suburbs.

About the only advantage foreclosures bring to other homeowners could be a cut in the tax bill. The Cook County assessor has plugged foreclosures into its formulas for determining market value, but those numbers are updated only during a property’s regular reassessment every three years.

“For the first time in years,” Ruda said, “I’m telling my people in Cook County that it might be worth it to appeal their tax assessment.”

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