Last night I made the drive down River Road to the Wyndham Hotel in Andover to be the guest speaker at the annual gathering of landlords who participate in Community Teamwork’s HomeBASE program which provides rental assistance to families in need. There were nearly seventy landlords in attendance from across the Merrimack Valley and the North Shore. The main topic of my remarks was recent trends in real estate in Lowell so I thought I’d share some of the main points here.

The volume of real estate sales is definitely increasing. My question is always who is selling and under what circumstances? People who have sold property in Lowell during 2013 can be grouped in three distinct categories:

The first is long term owners who are cashing in (or whose heirs are cashing in) on decades of property appreciation. An example of this might be someone who purchased a home in 1978 for $37,000 who now sells it for $180,000. Assuming the owner has not continuously refinanced the property to draw from the rising equity, that homeowner has made a substantial profit.

The second category is institutional owners selling recently foreclosed properties. There were a lot of foreclosures in Lowell during the past decade (although the pace is definitely easing this year) and in almost every case, the high bidder at the auction was the foreclosing lender. These properties are often called REOs (for “Real Estate Owned [by the bank]”) and tend to linger in the lender’s portfolio for many months, even for years. Eventually these houses (mostly) are sold to third parties who join the regular universe of homeowners, greatly reducing the odds that the property will be a problem for neighbors.

The third and final category of current sellers are people who acquired their homes within the past decade and who now are selling the property for less than they paid for it in the first place. Most likely these sellers are underwater on their mortgages meaning that they owe the bank more than they will receive in proceeds from the sale of the home. Up until this year, owners in this predicament were rarely able to sell because lenders were extremely unlikely to release their mortgage for less than the full amount owed. Consequently, many of these homes ended up in foreclosure. The approach taken by lenders seems to be different now. Partly as a result of changing market conditions but also due to recent changes in state law that encouraged lenders to consider compromising on some mortgages, an increasingly large amount of home sales are probably short sales which means that the bank agrees to take less than the full amount owed on the mortgage in exchange for releasing its mortgage on the property. This is not something that is done lightly; the bank must be convinced that the home is actually worth the sales price and that the current owner will absent a sale go into foreclosure. This also does not mean that the indebted homeowner is off the financial hook because he is still liable to the bank for the full amount of the debt although with the release of the mortgage the unpaid portion of the debt becomes unsecured. (As a practical matter, unless the debtor has a well-paying job or other assets, many banks will simply write off the remainder of the debt since it would be unlikely any additional amounts could be paid).

Looking at the average gain or loss on the sales during 2013 of homes in Lowell based on when the seller first acquired the home helps illustrate what’s going on in the market:

There were 12 sellers who acquired their homes in the 1970s. The average gain on these sales was $130,000 (only 1 of 12 sold at a loss).

There were 12 sellers who acquired their homes in the 1980s. The average gain on these sales was $107,000. (3 of 12 sold at a loss).

There were 45 sellers who acquired their homes in the 1990s. The average gain on these sales was $83,000 (6 of 45 sold at a loss).

There were 47 sellers who acquired their homes from 2000 to 2003. The average gain on these sales was $2,000 (27 of 47 sold at a loss).

There were 99 sellers who acquired their homes from 2004 to 2008. The average loss on these sales was $50,000 (72 of 99 sold at a loss).

There were 143 sellers who acquired their homes from 2009 to 2013. The average gain on these sales was $23,000 (45 of 143 sold at a loss).

That’s it for now. Tomorrow I’ll provide some numbers of the median sales price of properties in Lowell and some of the neighboring towns from 2000 to 2012.