How Foreclosures Affect Housing Prices
Foreclosures in a housing market are a double edged sword. For prospective buyers foreclosures can bring exceptional homes into their price range. But for a homeowner trying to sell his property, foreclosures bring a housing market over saturated with inventory at low prices.
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Definition of Foreclosure
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By definition foreclosure is the legal and professional proceeding in which a bank, or other lien holder, obtains a court ordered document that allows it to repossess a property. Foreclosures can take place when a loan on a property goes into default, usually due to non payment on the loan for one or more months.
Facts
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When comparing foreclosure to other circumstances that can affect housing prices, a foreclosure causes the greatest depreciation. When a house is sold after the death of an owner, the price drops on average 5 to 7 percent. When an homeowner declares bankruptcy, the value drops only 3 percent. However, when a home has been foreclosed, it reduces its value by 27 percent, on average.
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How Foreclosure Helps
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For a potential buyer a foreclosure saturated market brings a seemingly limitless amount of homes to choose from. A home that sold for $200,000 in 2005 is now on the market for $144,000.
How Foreclosure Hurts
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Foreclosure hurts those who are trying to sell their home. With so much inventory and a low demand prices are driven down. Homeowners with equity are hit especially hard -- when their home goes on the market it is immediately devalued. Foreclosures are used as comparable sales by realtors, to drive down the price of a home for sale.
The Future
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With foreclosures holding steady, the inventory of homes will increase, and prices will continue to fall. Even though interest rates are near record lows and affordability has improved, fewer potential buyers can qualify for new loans due to heightened credit standards.
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