Declining Home Values as a Result of the Foreclosure Market

In response to my post from yesterday, Ryan Ward shot me an email discussing some of the finer points of investment real estate.  He asked an for an opinion and I fired back with a response based on what I know about the goings on in the area of Cobb County foreclosures.  I reviewed my answer, asked his permission, and figured others might enjoy reading a portion of our correspondence.

Ryan:  "So do you think that inventories are going to continue to rise and prices fall across the board. I know that condos and new homes are hurting pretty bad. What’s your prediction?"

Me:  "Just my opinion, of course, but this is what we are seeing in Cobb foreclosures.  The properties are being released quicker to the market as they scramble to liquidate holdings.  In the past, I think they were just holding onto the properties trying to wait out the storm.  Problem is, the lenders can’t lend unless they can recoup some of their money.  So yes, there is definitely a downard impact to prices as a result of all the foreclosures.  We are seeing it on a monthly basis when we run our comps for next auction.

I am very disturbed to see May’s foreclosure numbers.  In the past that number should have gone down, not up.  What will be in store for us in June? 

I can tell you that there are far fewer investors on the steps than in the past.  This means that investors are being denied access to capital (which is partly true), sales are slumping even at our reduced prices (also true), or they are just afraid to participate.  The result is that the lenders are going to eat more of these properties at foreclosure and their books will swell with inventory.  Finally, the equity has pretty much dried up on the majority of homes in default.  While I can't say this is a hard fact, it is my gut feeling that it is the result of yesterday's widely available 100% financing coming home to roost.

Lenders haven’t slashed prices at the auction as I would have expected in order to help them exit from their mess.  Mostly, I think, because their hands are tied.  They desperately need to make up their losses and are trying just about anything.   Regardless, they seem to react slowly to a rapidly changing market.  I expect auction prices will fall towards the bottom of the cycle.

Not to sound too gloomy, because this will all pass through the real estate digestive system just like the savings and loan scam.  It will just take some time for the market to heal.  By that point, savvy investors will have added significantly to their real estate holdings and will be well positioned for a recovering real estate market.

As far as your comment.  I think Condos are always a dicey game.  They seem to get battered down fast and yet are slow to recover.  Builders are always the first to tank in a down market for a variety of reasons.  Primarily, new home sales is a spigot that can be turned off overnight.  Just look around to see all the red clay and parked equipment. 

Existing home sales are what we primarily deal in and that is a market that is thankfully slow to change up hill or down.  When the market is good, buyers turn to new homes thereby limiting the upside potential of existing homes.  When the market slumps down, existing home sellers roll up the welcome mats and wait for a better day."

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