Mathew Ferarra suggests that getting on with the foreclosures
is a healthy thing for the economy. Essay here.
"Contrary to popular belief, a wave of foreclosures would be
the best solution for the housing market. In fact, they’re
already amongst the best performing assets in the market."
"One-third of foreclosures are purchased by owner-occupying
first-time buyers. The rest are being snapped up by cash-
carrying investors turning them into rental units. Just follow
"Could waves of foreclosures cause existing prices to drop
further? It’s doubtful for a few reasons. First, sensible owner-
occupied sellers have already priced foreclosure prices (and
pace) into their offering price. If they haven’t, they aren’t in
the market anyway. A drop in their fantasy-emotional price is
irrelevant to the market. Second, the pace of foreclosure sales
is so brisk that prices should stabilize: It’s only rotting
inventory that causes downward price pressure on the stock.
If turnover remains high, prices will level off. Third, if more
foreclosures stimulate local economies, wages and consumer
sentiment will rise, sparking an up-tick in demand."
Not sure that I agree with the last paragraph. One of the reasons
that foreclosure sales are moving so well is the perception of
true bargain pricing. It seems logical to assume that sheriff
sales will continue to dominate the market for at least the next
twelve months or so. Markets like this are called "Buyers'
markets" for a reason. Having gotten used to these lower
prices, and knowing that the foreclosure pipeline looks to
be full for 2011, I'm not sure why Buyers would allow prices
to firm up any time soon.
The Case-Shiller Composite Indicies chart below would seem
to support Mathew's contention that prices are firming. In a
previous post, I opined that, before this crisis passed we would
see prices fall back to the year 2000's level, scrubbing out all of
the gains from the recent bubble. I'm hoping that Mathew is
right and I was wrong.