The slow release of foreclosed homes onto the market may be intended to “stabilize” prices, but it is not having that effect.   What is happening is that there is incredible competition for each home that comes on the market.  Buyers have already purchased the large inventory that had been sitting on the market so now with a slow trickle of new listings each home that comes on the market is getting over a dozen offers.  There are many families trying to get in to these homes, but the winning bids are consistently the investor “cash” offers.   Sale price is determined by market (recent solds) as well as the relative financial position of each offer.  A low down payment offer will need to come in at a higher price than an offer with a conventional loan to counter the attractiveness of a buyer with perceived better economic ability to close the deal.   Conversely, a cash buyer can offer substantially less than a buyer with a loan, the cash buyer has the attractiveness of a certain close.   What I have been seeing in the field is that a vast majority of the accepted offers are now cash deals.   The sale price is therefore on the lower end.  The effect is that the market is that we have haphazard comparable sales prices.   Competition among buyers who require a loan to finance the purchase push prices higher.   A high influx of cash buyers pushes prices lower.  

If we increase the supply of homes coming on the market we will be more likely to see stabilization of home prices.   Competition among buyers who finance their purchase will be more realistic.   With more homes on the market the relative percentage of homes purchased by cash buyers at a discount off of true market will be less and the impact more easily absorbed. 

The large inventory of foreclosed homes being held by the banks needs to be put on the market.  Not all at once, but at a much faster rate.  The current rate is NOT having the desired effect.

Robin Stelle

Robin Stelle          July 2, 2009

It seems counter intuitive to say that a decrease in foreclosures being put on the market would be "bad" for the economy.  Isn't it a good thing to stop the flood of inventory that depresses prices and home values for everyone?  Where is my compassion for the home owners who are in danger of loosing their house to foreclosure?   It is a painful economic adjustment for many people, myself included.  But, we need to look at where this current effort to stop foreclosures will put us?  Will it give us a return to the economic prosperity we enjoyed when home prices rose by more than 20% a year and even the pundits preached "leverage" and the use of home equity as an "ATM" machine?  NO.  Virtually stopping foreclosures as the federal government has plus the California 90 day moratorium on foreclosures will not bring back economic growth.  Home prices were inflated because loans were given out without scrutiny of the financial ability of the borrowers to repay the debt.  A false demand was created by artificially bloating the supply of buyers.  Home prices increased accordingly.   Now, fearful of the rapid decline in home prices we are trying to stop the "bleeding" and turn the market.  The combination of an overcorrection in lenders scrutiny of buyers which dried up loan funds plus an abundance of foreclosed homes and short sales on the market led to the last two years of rapid home value decline. 

California has two markets: Homes with purchase loans under the conforming limit of $417,000 and those above this range with Jumbo loans.   My comments pertain to the market within the conforming loan limits as this is where most of the population resides.  Their purchases affect the system.

In California we have now reached the point where the inventory has been purchased.  In many local Monterey county markets we have about one month of inventory available...this is a seller's market.  Individual home selling prices are increasing based upon multiple offers for every home.   Where very recently we had dozens of homes available to choose from, now there is a very slow drip of new homes coming on the market.  

Will the increase in purchase price for a few homes make a difference on the economy? Will it cause home prices to turn and give existing home owners more equity which they could draw upon to spend?  The hope is that they will so that we all benefit from an increase in cash in the local economy.  I contend that it will not and that we are artificially stopping an economic flow that needs to happen. 

There are many foreclosed homes still to cycle through.  By keeping these homes off the market and by delaying the foreclosure of homes whose loans are beyond the economic means of the homeowners, we are creating an artificial shortage of supply.   For the short term this may “stabilize” home prices, but soon enough those homes will have to come on the market.  There are two adverse effects.   First, currently we are seeing owner occupied home purchases being squeezed out by increased competition of cash investors.  With dwindled supply the potential home owner with real economic ability is unable to secure a home.  The economy is strengthened when we have a greater number of buyers who will occupy the home rather than investors purchasing to rent out the home or to flip it.   Second, we are fooling ourselves if we think that by stopping foreclosed homes from reaching the market that we will make a lasting change on market values.  Artificial changes don't last.   Have we not learned?  We need to let the natural flow continue and although prices may decline it will reach a natural balance.