The Foreclosure Freeze Won’t Hurt the Real Estate Market

by Glenn Kelman | 9 Comments

It has become an article of faith among politicians and journalists that the foreclosure freeze will drive down home prices. “The moratoriums, both state-mandated and self-inflicted, can be incredibly destructive,” a professor of real estate recently warned. “This can lead to further house price declines.”

Then on Wednesday, a treasury official told Congress that robo-signed foreclosure documents and lawsuits over foreclosed homes would “exert downward pressure on overall housing prices, both in the short and long run.” By Thursday, CNBC was airing a special segment on the mortgage mess asking how the real estate market would recover from the halt in foreclosures.

This question was impossible to answer because it doesn’t make any sense. When there are fewer foreclosures, there is less downward pressure on housing prices, not more. A joint Harvard-MIT study recently concluded that foreclosures sell for 27% less than comparable listings. The Center for Responsible Lending estimates that foreclosures lower the value of neighboring homes by $7,200.

One could argue that preventing banks from foreclosing on homes may defer the ultimate recovery, but the immediate impact is simple to gauge: if there is a decrease in distressed inventory, prices will stabilize, or even rise.

This isn’t a theory; it’s an empirical fact. Look at what happened in Southern California’s Inland Empire, which was awash in foreclosures through 2009. When bank-owned listings became scarce, buyers began competing with one another to buy those that remained, and 2010 prices steadily rose.

The truth is that the foreclosure freeze is a terrifying threat to banks, and perhaps to all of Wall Street, which could spend a decade in courts sorting out who owns what. But if the pace of bank-owned listings reaching the market actually slowed — which is not at all a foregone conclusion, given the enormous backlog banks are still working through —  it would probably come as a welcome respite to the real estate market.

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Discussion

  • http://blog.restphone.com/ James Moore

    You're making a fundamental mistake here. A foreclosure freeze does absolutely nothing to change the inventory of houses. They haven't gone away, they're just hidden. That's really bad.

    The uncertainty effect here is very, very large. If I'm a buyer, and there's a freeze, I've lost a vast amount of critical information about pricing. There's a bunch of real inventory forced off the market. It's still there, just in limbo. Don't know when it'll come back, but it most definitely will.

    And the holders of that property will be desperate. They will have held it for far too long, and will need to dump it quickly.

    So my reaction? Drop my offer by a lot. Things are already grim, and now I have to account for a large, unknown amount of extra grimness. You should definitely expect that to hit the market very, very hard.

    Or you can think that buyers are foolish people who will ignore that inventory just because someone stuffed it under the rug for a bit. Seems unlikely.

    • http://HomeSellingStrategist.com Clare

      As a Home Sellers Coach I'm always urging families to get into action and get it done. Time is not on their side and further analysis paralysis will certainly work against them. The MLS is unreliable enough without adding hidden inventory to the weak data informing the selling price. Do you know of an online source for this hidden inventory? Clare Michael, http://www.HomeSellingStrategist.com

  • http://twitter.com/mikesimonsen mike simonsen

    Glenn, my friend, a (protracted) foreclosure freeze WILL hurt the real estate market. The evidence is quite strong – (we see it when we measure the recovery significantly more slowly in judicial foreclosure states vs the 90-days-to-auction states). And the reasoning is intuitive. Of course fewer homes coming actively on the market right now keep the prices more stable right now. Temporary price stability is a lousy trade for a decade or more of non-recovery. A protracted freeze only kicks the can down the road. You're opting to subsidize current delinquent mortgage holders at the expense of potential buyers, investors, *actual* demand. IMHO, that can't be “good” for the market.

    These mortgages are not being paid and freezing the process does not solve that. Fewer homes on the market right now means the market takes that there are more later.

    A foreclosure freeze temporary to make sure the legalities are in order is probably wise. It would indeed suck to get wrongly foreclosed on.

    So, unless you're referring exclusively to a 6 month horizon, then I can't get there Glenn. A freeze is a very bad mistake. My thoughts from a couple weeks ago:
    http://blog.altosresearch.com/foreclosure-moratorium-a-very-bad-mistake/

    • http://www.mn-houses.com/mahtomedi.php Mahtomedi MN Homes for Sale

      Mike, you make some compelling arguments here. I think most of us agree with the short-term effect of the foreclosure freeze (market stability or a possible increasing price support), however, I tend to agree with you on the long-term affects of the freeze. Unless, there is matched demand for the foreclosure supply once the freeze is lifted, there will likely be a fallout on price support.

  • http://www.HomeSellingStrategist.com Clare

    Is this just one more way the banks have of being deceptive? No wonder our entire environment is highly suspicious

  • Brad Lee

    There's little difference between a bank holding inventory back or homeowners not in default but wanting to sell holding back from putting there house on the market too. Nobody wants a freefall in prices so they'll sit it out for now. The market (banks as well as homeowners) is speaking and inventory will become available as the market and pricing allows. Nobody is interested in selling just to appease vulture investors, only the most desperate will do so. As long as 90% of the population is still working and can make their payments they'll be patient, and that includes banks. But keep in mind builders are not building and the population is still growing…..a perfect storm.

  • Sue Rossi

    I absolutely agree and applaud Glenn for his insight and courage to speak up against the trend. The proof is in the pudding a/k/a the NAR 2010 Profile of Home Buyers & Sellers report released last week. First time buyer share of market increased from 47% to 50% this past year. While that may sound like something to celebrate, it's a dangerous statistic. Every first time buyer should generate 3 sales to ensure healthy trade-up activity. When a first-time buyer buys a vacant bank foreclosure, NO ONE ELSE MOVES. They hit a dead end. At 50% of overall activity, each first time buyer only represented 2 sales per person last year, as opposed to the 3 we need. That's a shortfall of 33% in the trade-up and new construction market. Take away the foreclosures as an option and we drive the first time buyers into the hands of owner-occupants, some of whom can then buy again, creating trade-up activity, and yet another can potentially build new construction. Some of the trade-up purchases may be homeowners in distress, AVOIDING someone's foreclosure, some may be persons looking to retire, freeing up a job somewhere, some may be investors flipping a rehab, allowing them to liquidate and come back in at the bottom. Keep that going for long enough and the trade-up market stabilizes, new construction gets a jump, jobs are created and by the time the bank trash comes back on the market the investors will absorb it upon news that the market has stabilized. I love the foreclosure freeze and think it's the best news we've had in 5 years.

  • Rebrokertexas

    The foreclosures that are currently sitting there, and not being put on the market, will come onto the market, in a large, wave, thereby skewing the upward value increases being currently discussed or fueled by lack of inventory. They are there, once the paperwork is confirmed, the Banks will go forward. Therby causing another glut, of properties, which will coincide with next Springs, typical private seller market. There are more people defaulting the last two months of this year, however, servicers are not going forward with the foreclosures without all paperwork in hand. The tax moratorium on dificiency judgements, falls off the end of 2010. If I read this correctly when the Congress put this into play, it was a 2 year moratorium, so the mortagors who are in default, need to get out before end of 2010, to be able to skirt paying taxing on the deficiency…. The constant government intervention into Real Estate after Wall Street shredded it, has caused more problems, than it has solved, as usual and these programs slowed the recovery in this Country . Until people move on, properties sell, someone goes back to HomeDepot to repaint, recarpet, etc… WE will not move forward people sitting in these non performing loans, are not even buying a can opener as they know they are moving, they are also not maintaining the asset, as they know they are moving. sometime,,,, and therefore they are frozen in time… waiting for the next Government program….Real Estate only works as a free market enterprise..Not the Mortgage lending, fraud, but the actual moving, buying and selling of the product ie, 2,000 homes, prices drop,,,,, 50 homes prices go up…. The constant Government intervention of trying to hold the actual product off the market, only makes the hole deeper…..

  • http://www.societe-a-hong-kong.com/societe-offshore.php offshore suisse

    Foreclosures have become fact of life in the current economic environment. The best way of overcoming the problems is orderly foreclosures that are staged over a few years.