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The US Foreclosures market is ripe for expansion

Abstract : Jeff Adams explains why foreclosures are good for the real estate market in particular and the economy in general.

Statistics have a way of bearing out exactly what you want if you are prepared to analyse them enough, which means that they should always be looked at within a broader context if they are to make any sense at all.

The US Treasury has forecast that within the next twenty four months more than 2 million foreclosures will occur across the country, many of them affecting over-leveraged, expensive houses whose owners can no longer afford to keep them.

This, taken on its own and with everything we know at the moment concerning the state of our home market and the global economy is nothing less that catastrophic news. But let’s take a look at the larger, shall we say, picture.

Foreclosures achieve two thing: 1. They correct a rapidly expanding market so that it does not keep on growing to the point that it becomes unsustainable and begins to catastrophically fail (and I shall explain this a little more fully in a minute). 2. They provide the fuel necessary to restart a stalled real estate market.

Let’s look at the first of these. Even in a totally booming economy there are foreclosures because our economy is set up in such a way that failure to meet certain financial requirements involving the repayment of debt have to have a certain degree of punitive measures involved. In an overheating economy, or rather, an overheating real estate market the tendency is for the market to absorb more and more buyers and ratchet the prices higher and higher as demand grows until we get to the point where, unless there is a correction, the market will collapse (and everyone remembers Black Monday in 80s) and the losses will be truly catastrophic. Foreclosures avoid these. Because, in our economy, foreclosures are always there as a proportion of sales the faster the real estate economy grows the greater is the number of foreclosures we see coming in.

Provided lending does not get out of hand so that inappropriate borrowers who are unable to meet the minimum requirements, come into the market, foreclosures are a mechanism that slows the market down until it is in a position to start growing again.

The second aspect I have mentioned is complementary. As foreclosures rise and the real estate market slows down the number of properties released back into the market as foreclosures becomes the necessary impetus that attracts new home buyers, attracts new money and makes sure that in difficult times the market keeps humming and gets ready for the inevitable pick up.

At the moment the US foreclosures market looks likely to expand. This means more opportunities for new buyers and real estate investors than ever before and that is only good news all around.