Key to economic recovery: House sales minus foreclosures?

Real estate foreclosure proceedings have been halted at GMAC, Chase and now Bank of America, the nation’s largest bank, in the 23 states (check out the list) which have court-ordered or judicial proceedings.

And so, you ask, what exactly does this mean for home sales? Or, can things get any worse?!

Well, aside from the furor regarding wrong-doing and sloppy record keeping by banks and the potential legal bombshell it predicates, believe it or not, the news actually might be helpful for the economy. The current onslaught of foreclosures might be temporarily halted while the foreclosure legal process is re-evaluated, or possibly, even re-defined.

Nearly one in four homes sold in the nation the second quarter of 2010 was a foreclosed residence – at a deeply discounted price. Realty Trac estimated that it will take three years to work through the inventory of distressed homes with banks predicted to take over a record 1.2 million homes this year. That’s up from about 100,000 in 2005 before ‘the bust’ in home values. Foreclosed homes registered an average discount of more than 26% compared with non-foreclosure home sales.

So, back to the point: Is this latest blast to the housing industry for the good, or another blow to an already bleeding industry?

NEGATIVE RUMBLINGS: Some Banking and housing analysts fear the foreclosure-document problems could prolong the already painfully slow recovery in the housing market by dragging out the still inevitable foreclosure process for years.

“If you are looking at the key in this country to economic stability, it’s the housing industry,” said banking analyst Nancy Bush of NAB Research. “This is a huge mess that helps nothing.”

POSTIVE SPIN: This recently disclosed document mess could make potential buyers change their mind about purchasing foreclosed properties as former owners could turn around and sue over the issue of faulty paperwork. If nothing else, the uncertainty plus the time-and-hassle factors could loom as a strong deterrent for many buyers.

Ironically, this temporary suspension in foreclosures could prop up some home prices in the short term. Why? Because fewer cheap, i.e, foreclosed, homes will be on the market competing for buyers. There is the possibility that when these foreclosures do go up for sale, the overall economy will be in better shape to absorb the foreclosure inventory with less price-slashing and pain.

“The irony is, it may actually support the recovery,” said Mark Zandi, chief economist at Moody’s Analytics. “It may be that when those properties actually hit the market, the economy is in a better place.”

1 comment

    • Marsha on October 27, 2010 at 6:56 pm
    • Reply

    Great information. We live in very interesting times.

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