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How foreclosures have affected us

How foreclosures have affected us

With a title like that I have to say that I am not speaking of how foreclosure has affected us emotionally. Although I have not experienced foreclosure personally, I have walked beside many clients who have been in the midst of the process and understand that it is a heart wrenching, helpless, terrible feeling. Rarely do people stop making their payments because they don’t feel like it anymore (although you do see that occasionally) it is much more frequently due to loss of job, unexpected change in payment because of the rate adjusting or the escrow payment (for taxes and insurance) increasing, or medical issues. It is terrible for anyone who has to go through it.

However, what I want to talk about is how the existence of this glut of foreclosures has affected our housing values. Consider these charts:

The two charts on the left side are sales in 2009, but the charts on the right are active listings. The part of the pie that are blue are foreclosures (sometimes referred to as REOs), the red represents sales that were subject to bank approval of short sale (they owe more than the value of the home and need the bank’s approval in order to sell) and the green are the “regular” sales.

What stands out to me is that foreclosures make up only 9% of the active listings it is 42% of sales. This means that they are selling at a significantly faster pace than other listings for a couple of reasons: 1) many of these are at a lower price range that is moving more quickly 2) people perceive a deal when they see that it’s a foreclosure (sometimes yes and sometimes no) It is not unusual for me to have someone say that they’re “looking for a foreclosure”.

The other thing that stands out to me is the short sale listings to short sale actives. Short sales are very time consuming and require real estate agents with a special skill set to get completed. Combine this with banks that are completely inundated with requests and it leads to many unsuccessful attempts at short sale (which become foreclosures). Heartbreaking.

What does this all mean? In the past we used to be able to ignore foreclosures when we would see them as comparable sales or competing listings. We can’t anymore. The sheer volume of their existence has brought down values for everyone. To see the market really rebound we have to see this get under control.