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One Advantage to Home Foreclosures: Lower Home Prices
By JLP | March 25, 2008
From today’s Wall Street Journal:
A glut of foreclosed homes of historic proportions is starting to drive down U.S. home prices faster as lenders put more properties on the market and buyers show signs of interest.
The ability of America’s lenders to manage this fire sale will be crucial to determining how long the housing market stays in the dumps — and how quickly blighted neighborhoods can heal. The oversupply is severe: In some major markets, including Las Vegas and San Diego, foreclosure-related sales have accounted for more than 40% of all sales in recent months.
On Monday, new data suggested that pressures like these are starting to drive prices low enough to attract some buyers back into the market. Sales of previously occupied homes jumped 2.9% in February from the month before, the National Association of Realtors said, the first increase since July.
Source: Wave of Foreclosures Drives Prices Lower, Lures Buyers ($)
Believe it or not, this is actually a good thing! In my opinion it’s much better that trying to keep people in housing that they can’t afford.
Sure, home foreclosures are bad for those who are losing their homes. However, one positive is that those who were previously priced out of homes due to high prices might now be able to buy. In other words, this housing situation is only temporary. If housing prices come down enough, THERE WILL BE BUYERS! Think of it as a reward for prudence!
One other interesting finding in the WSJ article:
Prospects for the housing market also depend heavily on the job market. As measured by the S&P/Case-Shiller national index, home prices jumped 74% in the six years through 2006. During the same period, U.S. median household income rose just 15%. (Neither figure is adjusted for inflation.) That discrepancy made housing unaffordable for many Americans.
The home-price index already has come down about 10% from its peak in mid-2006. But prices might need to fall much further, some analysts say. A recent Credit Suisse report projects that average home prices have another 40% to fall in the Miami metropolitan area, 36% in Phoenix, 26% in Los Angeles and 20% in Las Vegas if they are to become more in line with income levels.
Wow! Housing prices increase 74% while income only increased 15%. That’s a bubble if I ever saw one.
I say let prices fall. Eventually they’ll get to the point where people can afford them.
Topics: Housing Market | 13 Comments »
March 25th, 2008 at 11:53 am
My stepson and his wife just bought a place in Denver. If the price hadn’t gone down, they wouldn’t have been able to afford it. Likewise for a coworker here in Utah. Dropping house prices are a bad deal for sellers, but certainly not for buyers. Dropping house prices are really bad news for speculators who are flipping houses, much more so than for your average homeowner who buys and lives in a house for 5 years or longer.
As you say, in the long run house prices can’t appreciate any faster than income does.
March 25th, 2008 at 12:22 pm
My wife and I just bought a foreclosure property in Colorado Springs. It’s in a school district and neighborhood that we couldn’t have afforded previously. I feel bad for the previous owners, but it’s undoubtedly a great situation for us.
Before this we spent years in San Diego watching with unbelieving eyes as the values kept going up, wishing we’d bought in but figuring something like the current crisis was looming. We decided to do it conventionally, and that meant leaving CA for someplace saner. That decision combined with the meltdown provided us the best opportunity we had ever seen to find the right place, which we definitely did.
People who timed it right before still likely did the best, but those of us who waited have come out pretty good as well. This is a great time to buy.
March 25th, 2008 at 12:51 pm
Dropping house prices are good for buyers in the sense that they can afford to purchase a home they couldn’t previously afford. But dropping home prices due to foreclosures are bad for everyone because the perceived risk of even lower prices keeps potential buyers out of the market. A foreclosed home that remains unoccupied does not undergo any maintenance and is open to vandalism. Thus, foreclosures result in the destruction of real value, not just the correction of prices.
March 25th, 2008 at 1:03 pm
It is only a matter of time before home prices began to fall from their peak. You can’t have a market continuously accelerate upward. Whether it is foreclosures causing the problem, or simply a lack of buyers, it was bound to happen.
The thing about trying to offer incentives to keep people in homes that they might otherwise be foreclosed on is that it will not fix the problem.
If someone can’t afford their payments, they are obviously in more house than they probably need. What people tend to forget is that along with a big house comes MANY other big expenses that can’t be fixed by freezing their mortgage rate. You still have property taxes, you still have large utility bills to pay, and these costs are going to be there whether the bank allows you to stay in your home or not.
Trying to keep people from foreclosure is only going to prolong the problem. Prices need to come down, there is no way around that, and yes, having foreclosed properties can have negative effects in the surrounding community, but keeping someone in the house just for the sake of keeping it occupied when they still can’t keep up with their bills won’t solve anything in the long term.
March 25th, 2008 at 8:52 pm
I generally agree with the sentiments of your article and the other comments. However, do keep in mind that although Case/Shiller is a “national” index, it only means that it is national in scope. It only surveys 10 large cities (or 20 large cities — there are actually two indexes) across the country. These are exactly the places (e.g. Miami, Las Vegas, Phoenix, Boston, etc) that ran up the most and will come down the most.
Outside of the major urban areas, the rise was not nearly as dramatic, and most likely, the fall won’t be as dramatic either.
March 26th, 2008 at 8:35 am
I’m just hoping to catch the market like I did in 2004. I got a 5% fixed rate!
I’m also hoping to sell this house and move back to my hometown. I know hunting for the new home will be great, it’s the selling of my current home that I’m worried about.
March 26th, 2008 at 12:40 pm
I too agree that prices should come down; it’s only fair.
I don’t really feel sorry for people stuck trying to sell either. When the dot com bust happened and the market tanked, many lost much of their savings because of their risky, undiversified bets. Others (and those same individuals) got to buy low and are now reaping the benefits. This is the same thing, only it’s more tangible so everybody is freaking out (justifiably). Those forced to sell homes at a loss will also be able to buy their next house much more cheaply if prices are allowed to come down.
I have three little sisters in college who will most likely be seeking to enter the housing market in the next 5 years. Why should they be priced out of the market, or be forced to pay $500,000 for what is really only a $250,000 home just because lenders and speculators (incl “regular” homeowners who were really speculators) drove up prices and now the government is “fixing” the problem by trying desperately to prop up inflated prices?
March 28th, 2008 at 8:21 pm
Up in Canada our home market is still boiling, and everyone here is saying that we’re not going to see the downturn because of tighter lending standards here. That doesn’t stop the average home selling price in Vancouver (British Columbia, Western Canada for anyone who may not know) reaching $623,517. Add to that the median income for the same city is somewhere near 60K or so . . . that puts the average home at 10 times the median income of the area. The average home cost in the city is 17% higher than it was last year . . . nope, no bubble here.
Maybe I’ll be able to pick myself up a vacation home in the aftermath.
March 29th, 2008 at 12:23 am
I guess I’m one of the lucky ones where not only did the growth period last longer and go higher than a lot of areas, but the decrease is negligable. I saw somewhere a 3% drop in prices – pennies!
It’s amazing to me that I can’t figure out a way to get a house where I am. Maybe I’m still stuck elsewhere in my mind, but i just can’t buy something built in the 60’s for $350+/sqft
March 29th, 2008 at 8:26 am
Thomas,
Wow! At $350 per square foot, my house would be worth $796,250!
March 30th, 2008 at 12:30 am
Wow I’d love it if our area was even close to $350 per square foot and could sell for even a fraction of that. Around here, we’re closer to $120 per square foot, which hasn’t really changed over the past 3 or 4 years.
March 30th, 2008 at 8:35 am
Jeremy,
I’d even be happy with $120 per square foot as it would put my house value at around 3X what my wife and I paid for it in 1999. My best estimate is it is worth about $80 – $90 per square foot.
June 28th, 2008 at 4:39 am
It’s true that foreclosures have led to decline in home prices. But this decline is creating problems for those who are opting for short sales to avoid foreclosure. It’s getting difficult for them to locate a buyer who can pay them something closer to the loan balance, so that they don’t have to pay much from their pockets to cover the entire loan balance.
Regards,
Jessica