Builders continue to wonder whether the U.S. housing market will reverse course or continue to free-fall and potentially cause a second, more severe recession. With wave after wave of confidence-killing news, it’s hard to imagine when the housing recession will end. Fortunately we have good news — most buyers don’t want a trashed home that is in need of repair. This fact bodes well for builders who provide affordable new homes that are trouble-free and cost less to operate.

Granted, there is no easy solution to fixing the housing recession. However, one thing we do know is that home prices are being depressed by the compelling number of homes in foreclosure, near foreclosure, and pent up in “shadow inventory” (homes in foreclosure not listed for sale).

A report from Lender Processing Services provides the statistics below on the numbers of U.S. loans in trouble:

• Number of properties that are 30+ days past due, but not in foreclosure: 4,187,000

• Number of properties that are 90+ days delinquent, but not in foreclosure: 1,921,000

• Number of properties in foreclosure pre-sale inventory: 2,164,000

This means the number of properties that are 30+ days delinquent or in foreclosure is a staggering 8,272,000 homes.

With so much existing inventory on the market, it might be hard to imagine new home sales ever increasing. But, the problem with much of this inventory is that it is in disrepair and would cost too much to make livable. Most buyers today don’t want to buy a trashed home. In fact, Realtors in the Phoenix market and elsewhere tell me that when a quality home comes on the market, it goes fast. In some cases, the price is even bid up. Clearly, the market is saying that finding a good home comes down to more than just price.

Dumping the Trash

Mark Zandi, the chief housing analyst for Moody who spoke at the Housing Leadership Summit in May, stated that “a vast number of houses that are sitting empty will be destroyed by pests or suffer severe water and mold damage and will need to be gutted or raised entirely.”

Indeed, this summer Bank of America announced that it would start donating and demolishing hundreds of its 40,000 foreclosed houses, starting in the Cleveland area and moving on to Detroit and Chicago. According to the company, the tear-downs are in varying states of disrepair, with some estimated to be worth less than $10,000.

In an interview with Bloomberg, Gus Frangos, president of the Cleveland-based Cuyahoga County Land Reutilization Corp., which works to salvage vacant homes, said, “There is way too much supply. The best thing we can do to stabilize the market is to get the garbage off.” The Cuyahoga County land bank owns about 900 properties and will demolish about 700 in the coming months, Frangos says.

People want homes that are clean, pest free, and not neglected. It is not satisfying to buy a home with problems — not at any price. Clearly, these abandoned, dilapidated properties represent a different class of homes for sale — namely the “fixer-upper” that is attractive to a smaller subset of buyers and investors. All of this means that the real number of “good” homes for sale is much lower than the economists have predicted. Once this trash inventory gets properly recognized as such, it will create higher demand for the actual number of “good” homes for sale, and subsequently cause the prices and sales of these good homes to rise dramatically.

But none of this will happen until consumer confidence is restored and appraisers are forced to price foreclosures separately from homes in good condition. The good news for builders is that with every passing year, the staggering amount of trash inventory just gets worse, and the demand for new homes will have no choice but to eventually go up.

Paul Cardis is founder and CEO of AVID Ratings, the leading provider of customer loyalty research and consulting to the home-building industry. Through the AVID system, home builders improve referrals, reduce warranty costs, and strengthen their brands. He can be reached at paul.cardis@avidratings.com.