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.