Q.  How are regular owned, non distressed, homes sold with so many short sales and bank owned properties competing for the same buyers?

A. The simple answer is supply and demand and peoples need, current market acceptance and future market expectations dictate which properties buyer pursue and end up buying.  No matter what type of property it is, normal sale, short sale or bank owned, they all need to play by the market forces against which it's very difficult to fight.

The first chart below shows active properties.  The lender owned homes make up the smallest share, followed by short sales and almost 50% are normal for sale properties.  In terms of choices, buyers have a very limited choice of lender owned homes.  These seem to be the ones sought by many buyers because of their perceived added below market value which in reality is not always there compared to other types. 

Lender owned homes are price lower because the lower price is substantiated by the condition of the property: in other words, most, lender owned properties are in need of additional financial input to bring them up to a standard of other properties which are in better condition. 

For instance, painting, dead landscaping, missing kitchens or even appliances affect the pricing.  Since over 40% of the home purchases are done by low-down-payment first time home buyers who use FHA loans, properties need to be in good condition and many lender owned properties don't even qualify for FHA loans.

When a lender owned property is in good condition there is no reason for the lender to sell it for less then market price, the same price a normal seller can fetch and often they sell for above market price, surprisingly.  

Short sales are another matter.  Not everyone can or is willing to pursue them through to the end and even so the end may never come.  From the time  you submit a contract to the time the transaction will close can be anywhere from a few months up to a year and no one know how long it will take plus once you get to the end the transaction may fall through for reasons uncontrollable by the buyer: in other words they are risky.  How much competition do they pose for regular sellers?  It's hard to measure and it depends, but the seller's lender is not going to accept an offer much lower then market price.

That's why you see the results on the graph below.  Lender owned homes make up about 45% of the sold market and short sales about 23% of the market.  Distressed properties together make up 68% of the market because a lot of people are willing to deal with their added issues in return for a lower price plus there is a perception, often a wrong one, that they get  substantial real discount on the property.  None the less about 1 in 3 homes sold are normal sales and they sell because they are able to compete with the other two segments.

So let's take a look at the 'normal' market in detail: in real numbers.  The inventory of normal properties is still high and if we single out this segment we'll see that there is an 8 month supply of homes and that clearly puts that market in the favor of buyers.  The REO market is in the sellers court while the short sale market is fairly balanced. 

The inventory of 18,000 homes is just as always a mixed bag of motivations.  Not all properties for sale are owned by motivated sellers.  Even now, some are testing while others are hoping. 

A houdr close to my home just went off the market after being there 2 years and through out those 2 years it was always over-priced even though the sellers had plenty of equity to meet the market.  I know because they asked me market it for the over-market price and I refused.  After 2 years they took it off the market.  There are plenty of these.  Then there are owners who have had homes for along time and they are able to sell for a profit.  

It also depends on the price segment a home is in.  Lower priced homes were hardest hit with the highest percentage of distress while that proportion of distress decreases as the price climbs.  The higher the price the higher the proportion of normal sales.  In fact for homes above $350,000 are over 2/3 normal.

(all graphs are from The Cromford Report)

How can 'normal' sellers compete, what advantage do they have? Assuming they they can compete on price adjusted for other factors the advantage is in fact the 'normality' of the transaction: the, usually, better condition of the property: and the predictability and time frame of the process.  In December 2,100 normal properties sold, that's 4,200 different parties that greed on a normal old fashioned sale and I'm sure most of them did not overpay nor did they sell for less then market price.