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Foreclosures indicate the state of the economy

Abstract : The US real estate market is about to start recovering and a vital ingredient of its recovery is the number of foreclosures.

The litmus test of the performance of any market lies, exactly, on the performance of its least admirable sector. The real estate market is no exception and for real estate the sector which always sits uneasily in statistics reports as well as national and local news is the number of foreclosures.

Without a doubt the number of foreclosures we are seeing reported and recorded is on the increase. Statistics show that there is likely to be a further spike in foreclosures over the next twenty-four months, the inevitable result of some lax lending practises which crept in, in the drive to clinch sales and meet tough targets.

The pressure for those of us who look to the real estate market for a living is to understand exactly what the litmus test results really mean so we an get prepared to act accordingly. It’s not exactly easy but neither, do we need to accept, it is rocket science.

Let’s examine exactly what foreclosures are: In terms of real estate they are wastage. Without trivialising it, it is like the breadcrumbs that come away when you slice open a bread roll. In real estate there will always be some foreclosure activity because our national economic model is geared up around lines which penalise defaulting home owners with the foreclosure on their home.

Wastage is part of any normal activity and an indication of the level that activity is undertaken at. For example, if we were to use my bread roll analogy, one bread roll being cut open does not produce that many breadcrumbs anyway, but try slicing open one thousand bread rolls and suddenly you have a small mountain of breadcrumbs piling up around your feet.

This is exactly the same with foreclosure activity in the US right now. The number of foreclosures we are experiencing is an indication of the volume of sales and the percentage of home ownership in this country plus the fact that the market grew steadily for a length of time without let up.

To see what it means I will need to use my bread roll analogy again. A thousand bread rolls gives us enough breadcrumbs to actually do something useful with rather than just sweep them away. Similarly, the number of foreclosures we are experiencing now provide us with the opportunity to actually make advantageous buys and real estate investment decisions which will help the economy, ourselves or first time buyers.

This is a classic win-win scenario that is often overlooked in the national press predilection for doom and gloom stories, but gives a more accurate picture of the state of the health of the US real estate market which is good enough to heal itself and begin again to grow.