Foreclosures Could Bring Home Prices Further Down by 10%

by 05 Apr 2012

( -- 4/5/2012 -- Median home prices in the United States could fall by another 10 percent, according to foreclosure analytic firm RealtyTrac. This grim assessment arrives in the wake of the historical foreclosure settlement agreement signed by state attorney generals, the U.S. Department of Justice and the nation’s five largest mortgage lenders.

The significant price drop is directly related to the settlement agreement. While state attorneys and federal investigators performed court-ordered investigations into the dubious foreclosure procedures of the banks named in the lawsuit, the foreclosure machine came to a virtual halt for about a year. Now that a settlement agreement has been reached and the provisions are being implemented, more than a million previously halted foreclosures will proceed. As these homes end up repossessed by the banks and on the judicial auction block, the median prices of American homes will be negatively affected.

How Distressed Properties Erase Equity

Mortgage borrowers who are no longer able to make monthly mortgage payments have a few options to help them avoid default. Many of these options became available thanks to efforts by the Obama administration, but most troubled homeowners haven’t been able to take advantage of them. As a result, 1.25 million homes in the U.S. are now considered distressed.

One of the major problems attributed to distressed properties is that they erase equity from the housing market they are located in. Most homes undergoing foreclosure proceedings, whether occupied or not, fall into states of disrepair. A recent report released by the Federal Reserve Bank of Cleveland indicates that once a distressed property is repossessed by the bank, it ends up being sold by less than 35 percent than the price listed by the bank.

When foreclosed homes end up in the real estate-owned (REO) portfolios of banks, they are seldom well-cared for. The only exceptions are the multifamily complexes and apartment buildings repossessed by government-sponsored mortgage investors Fannie Mae and Freddie Mac. These multi-unit properties have joined the burgeoning rental market in several metropolitan areas and have been well-cared for, but this is not the case for most distressed single-family residences.

Bulldozers Recommended for Long-Term Foreclosures

A dismal recommendation by the Federal Reserve Bank of Cleveland calls for bulldozers and demolition crews to descend upon communities where distressed properties have sat for a long time. In January of this year, Congress reviewed a report sent by the Chairman of the Federal Reserve Bank Ben Bernanke. The report indicated that about 500,000 foreclosures in the U.S. are vacant and in a serious state of disrepair.

The reason why these long-term foreclosures are allowed to fall into such disrepair is the same reason they fell into default: occupants did not have the means to make monthly mortgage payments, and they were not about to maintain a property they knew they would eventually be forced to move out of.

Getting Rid of the Bad Apples

There may come a point when home shoppers will no longer be interested in bargains and will not even look at distressed properties. The market for new homes has improved, as evidenced by the number of new home permits filed by major home builders in some regional markets, like Phoenix. The next wave of homes that will flood the market will include many foreclosures that investors and house hunters will probably not be interested in.

With the sheer number of dilapidated homes currently frozen in foreclosure status, there will be many bargains available to investors and flippers in 2012, but only if they are willing to put some “sweat equity” into their acquisitions. Sellers must keep in mind that buyers will be taking a close look at property records, and if they find that the home sat in foreclosure for a long time, they may start negotiating downward and bringing home inspectors who will closely scrutinize the property.


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