Foreclosures And How They Affect You - Virginia Beach Neighborhoods

Do you think that foreclosures are to blame for the falling home prices? I don’t. I think falling home prices are partly to blame for the foreclosures. But we can debate that for the next ten years. The most important thing to consider is how do foreclosures affect your neighborhood.

First lets get a couple of things straight. Foreclosure is not synonomous with good deal. Along the same lines, a home priced below the average market value in a neighborhood is not neccessarily a good deal either.

Foreclosures are caused by the owner being unable to pay his mortgage. Maybe he lost his job. Maybe his trust fund ran out. The reasons are not as important. The owner made a promise to his lender that he would pay back the money he borrowed, usually over 30 years as in a conventional 30 year mortgage. The house is used as collateral. When the owner stops paying as promised, the bank comes a knockin.

In a robust economy, everything runs along smoothly. The homeowner gets a raise and home values increase. Before too long, he starts to feel wealthy. His home price doubles and his zero percent downpayment has netted him 50% equity in his new home. Isn’t capitalism great!

Unfortunately, the economy “has fallen off a cliff,” to quote Warren Buffett. The homeowner has lost his job and can’t keep up with his mortgage payments. As long as he can sell his home foreclosure won’t be a problem. However, if what he owes is more than the home is worth, now we have a problem.

Most of the time a home facing foreclosure looks the same as every other house on the market. The owner is simply trying to sell the house to keep from going into foreclosure. Once the bank repossesses the property, things start to change. Banks are not in the business of selling houses. At this point the bank is probably taking a loss and simply wants to unload it. They don’t clean it, paint it, fix it or anything. And they are not emotionally attached to it like other homeowners. They price it to sell. In this market, with lots of supply and little demand, that means pricing it lower than everybody else. It’s easy to see how a couple of foreclosures can bring down the prices in a neighborhood, especially if they are the only thing selling.

Still, it is not the foreclosures that are dragging down home prices. There are more homes on the market right now than there are people to buy them. If everyone simultaneously dropped their asking prices 10% you would still have the same problem. The banks treat their homes as a commodity and price them to sell at whatever price the market will bear. It is far more difficult to get the average homeowners to think of his home as a commodity because it is not. It is where they go to sleep at night, raise their children, and eat Thanksgiving dinner. And no one wants to give their house away.

Until demand increases or the supply decreases,  banks will be selling their properties for less than everyone else. Foreclosures will continue as long as people who borrowed money, can’t fulfill their promise to pay it back.