07/05/2010

Effect of foreclosures on American housing market

The number of homes going into foreclosure is, by some measures, more than 300,000 a month. Buyers are taking advantage of that trend. RealtyTrac reports that “foreclosure homes accounted for 31 percent of all residential sales in the first quarter of 2010, and that the average sales price of properties that sold while in some stage of foreclosure was nearly 27 percent below the average sales price of properties not in the foreclosure process.”The most stunning information from the research is that “Total foreclosure sales in 2009 were up more than 1,100 percent from 2006 and up more than 2,500 percent from 2005.”

The news in another piece of data about why the housing recovery, if there was one, has stalled. Homebuyers can take advantage of the need for banks to sell “abandoned” homes to get them off their books. Banks are ill-equipped to maintain vacant properties. Financial firms are better off selling at a loss than watching properties fall into disrepair.

The other troubling aspect of the news is that as buyers opt to pay very low prices for foreclosed homes, sellers of homes not in the foreclosure process must compete against banks looking to unload homes at rock-bottom prices. This brings down housing prices and puts more mortgages underwater. Industry estimates are that 11 million homes across the country are worth less than their mortgages.

Those homeowners with underwater mortgages, some put there by downward pressure of lower prices on foreclosed properties, are more likely to abandon their own residences because it makes no financial sense. They also have lost the ability to use the value of their houses for retirement or other expenses.

The foreclosure problems has become a vicious cycle, and one that is nearly impossible to break until house prices drop so low that buyers will move back into a market in which the cost of residences are at multi-decade lows. At that point, government tax breaks and low mortgage rates may no longer drive the market. An environment in which home prices have dropped 30% or 40% may be all the priming that the pump needs.

Source: D McIntyre

P4P Comment

As might be expected, the surge of foreclosed homes has dragged down values of ordinary for sale house in America. This in turn, will reduce the value of some people’s homes below that of their loan. That is only a statistical discomfort if the owner can still pay their mortgage. However, if the price slumps too far below mortgage value, there is always the temptation to do a voluntary foreclosure to write off the debt.

This is part of the process of passing through the backlog of foreclosed homes. The surge of such home sales is huge compared to previous years as noted above, but it will end. In fact, it is ending. Buyers of our foreclosed American property can take great comfort from knowing that they have paid a fraction of historic value for their properties and stand to clean up when they sell into a market which is not being dragged down by mass sales of repossessed US homes.

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