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Will Foreclosures Get Cheaper or More Expensive?

Foreclosure Real Estate

Will Foreclosures Get Cheaper or More Expensive?

The short answer is that no one knows for sure.  Economics 101 teaches us that an item’s price point depends much on the relationship between its supply and its demand.  So when it comes to foreclosure properties, what might we expect for changes in the supply and the demand?

Changes in the Supply: 

We do know that the foreclosure rate is going up in this country.  So, in the next two years there will be more pre-foreclosures and more foreclosures than there were in the last two years.  From the time the whole “Robosigning” issue entered the public awareness in 2010, lenders and loan servicers have been reluctant to aggressively foreclose on defaulted loans in many states.  They were afraid of the growing liability that they were being exposed to from years of potential legal errors in foreclosure processing.  But, in February of this year, the federal government and the Attorney Generals from 49 states (all but Oklahoma) hammered out a deal with five of the nation’s biggest banks — Bank of America, JPMorgan Chase, Wells Fargo, Citigroup and Ally Financial.  The banks have to pay about $26 billion in exchange for protection from further legal actions.  But, now those same lenders have a green light to tenaciously ramp up foreclosure actions to make up for lost time.  Plus, it is possible that the government will work out a similar deal with eight other institutions —HSBC’s United States bank division, SunTrust Bank, MetLife, U.S. Bancorp, PNC Financial Services, EverBank, OneWest and Goldman Sachs.  This could result in even more foreclosures in the near future.

Changes in the Demand:

Various reports that have come out this year seem to show that improving buyer activity is increasing the number of sales of foreclosures (and non-foreclosures) in many parts of the country.  This competition is causing prices to shift up.  As an example, the National Association of Realtors (NAR) recently announced its 2012 first quarter figures.  NAR reported that the median existing single family home price went up in 74 out of 146 metropolitan areas based on closings in the first quarter from the same quarter in 2011.  This was an improvement from the 2011 fourth quarter figures where only 29 metropolitan areas were showing gains from a year earlier.  It seems that the change in buyer confidence is putting demand on the upswing.

So when it comes to foreclosure real estate, the big question is which will be more powerful in the next year or two: supply or demand.  If demand out guns supply, then we may very well see prices continue to increase.  But, if the inpouring of new foreclosures outshines the demand for them, then we may see prices begin to fall again.

Eric Buchanan
Rich Dad Education Elite Trainer and Mentor

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2 responses to “Will Foreclosures Get Cheaper or More Expensive?

  1. aaron west June 21, 2013 at 10:14 am

    That makes logical sense but it still doesn’t offer an ‘educated prediction’. How can we best analyze within a given market as to whether the FC pricing will go up or down? What is the best way to determine Supply/Demand of FC?

    • Rich Dad Education June 24, 2013 at 4:10 pm

      In the Foreclosures Elite Training, we teach how to determine the stability of the pre-foreclosure market and how to take the ‘temperature’ of the Foreclosure Sale (Auction) market. Those processes are very involved and hard to try to explain here in the blog, so let’s look at something that is a little easier to quantify … the foreclosure bank-owned (REO) market. REOs are a little more predictable. They tend to follow the general real estate market because right now they are being sought out by all three types of buyers: retail owner-occupied buyers, uneducated investors and educated investors. So, to analyze and predict the change in foreclosures, one can see how the REO average sold price and the average days-on-market (DOM) has changed from one month (or quarter) to another month (or quarter). If the DOM has gotten longer, than there is a good chance that the there is an increase in foreclosures (supply) and/or there is a decrease in the demand for foreclosures by buyers. Similarly, if the DOM is getting shorter over time, then the market is experiencing a decrease in supply and/or an increase in demand. This is assuming that the mix of the type of buyers (retail, uneducated investor, educated investor) has not changed. For example, sometimes demand goes down because retail buyers and uneducated investors get spooked by recent economic indicators. Yet, many times in these cases educated investors responded in the opposite manner and begin to invest more aggressively. Nonetheless, the market notices a net decrease in the demand for foreclosures and therefore prices can drop. Eric Buchanan

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