Some media outlets report that the housing decline is due to a simple supply and demand problem. The inventory levels of properties are high, so logically, as long as this remains, sale prices will remain low. They report that foreclosure properties contribute to this decline, but that’s about it.
We often hear that it’s the past practices of the banks that explain the meltdown. There is some truth to that, as each year brings new mortgages that reset at interest rates that people will be no longer able to afford. These bad mortgages will have to make their way through the system before their negative contributions will cease.
The banks that are selling foreclosure properties are disposing of their real estate in manners that defy logic, supply, and demand principles. The general public doesn’t know it’s happening, so they are misinformed. The agents that are selling real estate for the banks don’t dare expose this because they are the only ones in real estate that are making any sort of money and will not risk the loss of their gravy train by biting the hand that feeds them.
I’m going to leave you with some data and a story that will hopefully begin the enlightenment, and speak to the seriousness of this problem. Realtytrac has shared with us that in 2010:
- When a property becomes a short sale, the average discount on the home’s sale is 15 percent.
- When a property becomes a foreclosure, and is owned by the bank that is now the seller, the average discount is 36 percent.
- In the State of Illinois, when a property becomes a foreclosure, and is owned by the bank that is now the seller, the average discount is 46 percent.
When I look at the above data, I question the supply and demand theory. Why would real estate decline so much when it becomes a foreclosure to be sold by the banks? To me, the answer is simple: It is HOW the banks sell their properties.
We know that the banks were ill prepared to handle the influx of bad mortgages, evidenced by the settlements that they have made with many states by mishandling foreclosure paperwork. Why should we believe in a fairy tale that all is well and running smoothly in the 'never never land' of the bank’s REO departments that are tasked with selling these foreclosed properties?
In early 2011, there was a property in the Chicago area listed for $190,000, and the agent was negotiating an offer that had reached $170,000 before it was 'pulled' from normal inventory and sent to auction. A few days later, the bank agreed to sell the property for $121,000. At $170,000, that represents at 28 percent discount. The buyer may have come up more, so the net could have been even higher. So I ask the media and their real estate experts: Is this an example of supply and demand driven real estate selling?
The sad fact of the above story is that this sale took place in a “cookie cutter” community, where there are only a few models of homes. The untold and scary reality of this is that not only are the banks contributing to the housing crisis by having given bad mortgages to unqualified people, but they are now perpetuating the problem by incompetent business practices. How banks sell their foreclosure properties is creating a new group of distressed homeowners.
What do you think the probability is that the values in this subdivision have now decreased? Has it now caused a homeowner to be underwater in their mortgage? Has some ones home equity line of credit been canceled because there is no equity? Has that homeowner had to cancel the plans for the new pool or play set in their backyard because their line of credit has gone away? The implications of these business practices have far reaching implications beyond just the housing market.
I’m sorry to report that unless the general public, share holders, the media, and our legislators begin to understand, act, and hold the banks accountable now for how they sell their foreclosures, this housing crisis continues into perpetuity.