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The New Foreclosure Mess: A Possible Silver Lining

There is no doubt that the current foreclosure mess is creating havoc in the housing industry. Listings are being removed from the market and many closings are being delayed and, in some cases, even canceled. No one is sure what the full impact of the situation will be or when it will be rectified. However, there could be a silver lining to this gigantic cloud of doubt.

First, let’s try to define the challenge. The Wall Street Journal quoted Adam Levitin, associate professor of law at Georgetown University, as saying there are three scenarios that could take place:

1.) In the best case scenario, the issues are simply technical, the situation is resolved and the foreclosure process continues. Many believe housing won’t recover until the glut of foreclosed homes clears the market.

2.) In the medium-case scenario, litigation ensues and the matter takes years to sort out. That will inflict more pain onto the already troubled housing market.

3.) In the worst case, the issues become a “systemic problem” that grinds the mortgage market to a halt and title insurers refuse to insure mortgages involving existing homes.

How long might it take to rectify the situation?

The deeper the problem gets the longer the solution will take. At first, the banks were talking in terms of weeks. Now people are guessing it could take months.

Calculated Risk reported excerpts from the JP Morgan conference call yesterday:

 Analyst: The foreclosure suspension, it’s a matter of weeks instead of months, did I hear you say that?

JPM: No. I didn’t say weeks to clean up the files. We actually have to have little in depth conversations with regulators and AGs and stuff like that. So I don’t know exactly when. I’m hopeful that it all starts to move at one point. I don’t know if it’s going to be three weeks or five. But I think it will be a real shame if we don’t get this resolved and moving again.

Analyst: In all likelihood you should be allowed to foreclose as we go into next year.

JPM: I hope so. It’s not up to me.

Fox News reported yesterday:

Foreclosed homes that would have been sold by lenders now will be sold seven or eight months from now … said Andres Carbacho-Burgos, an economist at Moody’s Economy.com.

Diana Olick of CNBC probably said it best:

Anyone who says that the banks will fix all this in a few months is seriously delusional.

Where is the silver lining?

We often talk in this blog of the concept of ‘supply and demand’ and how it applies to future home prices. We have warned that prices will face downward pressure as the banks release their foreclosure inventory to the market. It appears that the release of much of that inventory will now be delayed for months. That creates an opportunity for any seller to  sell their house now without facing that discounted competition.

The Wharton School of Business at the University of Pennsylvania addressed this issue. In the article, they said:

Wharton real estate professor Susan Wachter says the foreclosure freeze might temporarily buoy prices by keeping foreclosed properties off the market.

In the Fox News reported mentioned above, Carbacho-Burgos said:

That’s good news if you’re a homeowner looking to sell in the near term, because there won’t be as much competition from deeply discounted foreclosed properties.

Bottom Line

We are not suggesting that prices will begin to increase, just that they won’t fall as rapidly as originally predicted. It will be better to sell now rather than wait and compete against the flood of foreclosures that will be released once this challenge is corrected.


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6 replies
  1. Matthew Ferrara
    Matthew Ferrara says:

    Steve:

    Great post, but I have a question: Why is less choice and higher prices a “good thing”? Who likes to pay more for anything – computer, airline ticket, medical expenses – and have fewer choices to select from? I’m talking, of course, from the buyers’ perspective, especially those who are having property sales pulled out from under them by the “recall” of foreclosures or pushed farther off by the possibility now that prices will rise…..

    Investors have already indicated they aren’t interested in playing at higher prices, and were just getting back into the market as they were reaching the lower prices of these foreclosed properties. Normal single-property purchasing consumers are under serious inflationary pressures, unemployment concerns and eroding savings: higher prices don’t help them, either. The only people higher prices help are sellers, but since it’s a buyer’s market, I can’t see how even sellers are really better off if their home prices are allowed to rise.

    Then again, I’m always the contrarian!

    Matthew

    Reply
  2. Steve Harney
    Steve Harney says:

    @ Matthew,
    In the short term (could be weeks, will probably be months), sellers of non-distressed properties will avoid having to compete with as many discounted properties (foreclosures) as they would have. From a simple ‘supply & demand’ calculation, that means prices will not be as negatively impacted as previously thought. For whom is that a “good thing”? Any homeowner trying to sell.
    Steve

    Reply
  3. Shawn Shackelton
    Shawn Shackelton says:

    I agree that we could begin to see pricing stabilize for now. However, what concerns me is that when the foreclosures are placed back on the market it could, as you say affect the supply & demand aspect of the market and drive prices down. This will send the media into a tizzy and begin the talk about the real estate market in a “double dip”. Causing more uncertainty in the market.

    Reply
  4. Gil Bricault
    Gil Bricault says:

    My opinion is that it will have a negative impact on the current as well as future market. Many people make their purchase decisions not only on today’s prices but on anticipated prices. Those who have to buy now…will buy. But those who feel they can afford to wait and expect prices to drop…will sit on the sidelines waiting to see what happens. And now with the FED talk of lower interest rates TO COME. Why not wait could become the mantra!

    Reply

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