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Distressed sales drag down market

<i>Homes on auction block in outer boroughs slow deals for 'normal' properties</i>

Go to charts: Distressed sales by borough and zip code

Distressed sales, long a burden on housing markets across the country, are increasingly hurting far-flung neighborhoods in New York City’s outer boroughs.

And, according to experts, the worst is yet to come. So-called teaser rates, or initial rates, on five-year adjustable mortgages have not yet expired, and spreading job losses are pulling more and more city homeowners into the red.

Market analysts say banks are trying to get ahead of the downward trend by approving short sales at rock-bottom prices and rejecting nearly closed “normal” sales if the appraisal comes back lower than the agreed-upon price.

According to figures provided by PropertyShark, the swath of neighborhoods surrounding John F. Kennedy International Airport — including Jamaica, Ozone Park, Springfield Gardens and St. Albans — has the highest concentration of distressed sales. Six of the top 10 hardest-hit zip codes in the city are in the area.

Averaged, the percentage of sales there that qualify as distressed increased from 19 percent during the fourth quarter of 2007 to 31 percent during the third quarter of 2008, according to PropertyShark data (fourth quarter figures were not used because up to 15 percent of sales were not filed as of press time).

Overall in Queens, the percentage of sales that qualify as distressed increased from 8 to 11 percent during the same time period. Meanwhile, property values in these areas have been devastated, and non-distressed sellers are finding it more difficult to sell their homes.

“They have to sell for typically 30 to 40 percent less than what they bought it for,” said Katy Pierre, a licensed sales associate for Prudential Network of Homes in Jamaica, where nearly every block has at least one home in some stage of foreclosure and even more “for sale” signs. “Now buyers are taking longer, looking for deals,” Pierre said.

Jerome Willis, an associate broker for American Homes of Staten Island, echoed that point. “It’s hard to sell a regular home that’s not in foreclosure because everybody is looking for a foreclosed home and good deals,” he said, adding that properties that once took 90 days to sell now sit on the market for 120 to 150 days.

Local resident Joshua Bavaro said his grandfather’s Jamaica home, which does not qualify as “distressed,” has been on the market for four months. “Not a single buyer has come through this door,” said Bavaro, who is assisting his grandfather in the sale of the home.

Bavaro’s block is typical of the area. There are four other “for sale” signs on his street and five properties with a foreclosure or lis pendens filed against them within a two-block radius, according to PropertyShark.

“If there are five foreclosures on the block, why would someone pay full price when they can go down the block and get it 30 percent, 50 percent off?” asked Sam Heskel, founder of HMS Associates, an appraisal firm.

The hardest-hit neighborhoods

According to HMS, the average sales price on one- to four-family homes in the Ozone Park and Jamaica area dropped 16 percent to $427,229 in the fourth quarter of 2008, from $507,784 in the fourth quarter of 2007.

On the distressed sales front, Brooklyn, the Bronx and Staten Island followed Queens closely with 6.3 percent, 9.4 percent and 10 percent of sales qualifying as distressed, respectively, during the third quarter of 2008, according to PropertyShark. Zip codes in Brooklyn’s Bushwick, East New York and Park and Jamaica area dropped 16 percent to $427,229 in the fourth quarter of 2008, from $507,784 in the fourth quarter of 2007.

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On the distressed sales front, Brooklyn, the Bronx and Staten Island followed Queens closely with 6.3 percent, 9.4 percent and 10 percent of sales qualifying as distressed, respectively, during the third quarter of 2008, according to PropertyShark. Zip codes in Brooklyn’s Bushwick, East New York and Bedford-Stuyvesant neighborhoods made the other three spots on the “hardest hit” list, with distressed sales comprising between 12 and 24 percent of the overall market.

“There are areas in Brooklyn — East New York, Bushwick, Bed-Stuy — where most of the sales don’t look like regular sales,” said Heskel. Such sales are generally spotted, he said, when the closed price comes in significantly lower than the listing or previous purchase price.

According to his figures, the average sales price on one- and two-family homes in Bushwick dropped 6.7 percent, from $549,399 during 2007 to $512,649 during 2008. The average sales price for one- to four-family homes in East New York dropped 7.8 percent to $494,150, during the same time.

Manhattan, with its more expensive housing stock and more stringent lending standards, has largely avoided the phenomenon. Only 1 percent of Manhattan sales were distressed in the third quarter of 2008, according to PropertyShark.

The homes the Web site tracked as distressed included those that had either a foreclosure or lis pendens filing within 12 months of the sale. PropertyShark did not include “short sales” with no foreclosure filings against the home, where the homeowner negotiates a sale with the bank at a reduced rate to satisfy an imminently troubled mortgage.

Bill Staniford, CEO of PropertyShark, pointed out that official sale prices across the city will only continue to decrease as contracts signed within the past six months close.

In addition, he said, prices will continue to fall as banks increasingly approve short sales and reject “normal” sales after appraisals come back lower than the agreed-upon price.

Keeping deals alive

Michael Reinhardt, a corporate attorney for Fillmore Real Estate, said his law firm is considering adding a clause to his residential real estate contracts so that if an appraisal comes back at a lower value than the contract price, the seller has the option to lower the price and the buyer is still obligated to make the purchase.

“In the last quarter, I’ve had multiple deals fall apart because of the appraisals,” Reinhardt said. “I do believe by springtime you’ll see [this clause] in all contracts.”

Since appraisals are based primarily on nearby sales, auctioned homes and short sales are taken into account when determining the value of the home.

“How do you determine the fair market value of a home in a declining market?” asked Heskel.

Jonathan Miller, president of the appraisal firm Miller Samuel, said sellers are being forced to factor future market drops into their asking price.

“If you’re competing with 50 other listings in your price range in your neighborhood and the market is declining at a rapid clip, you can either take that market decline [off the price] now or wait to sell it and take that discount a year later,” he said. Banks are “lopping off the price now knowing it’s inevitable that it’s going to happen.”

As for Manhattan, Miller said that according to a rough survey of transactions, contracts for units were being signed in December for 20 percent less than contracts for similar properties signed in August.

And though few distressed sales are taking place in Manhattan, any decline in sale prices in the borough will have a ripple effect on the outer-borough markets, as prices there will have to drop accordingly. “If the market is already declining, compounded by existing distressed sales, it’s a double whammy,” he said.

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