The Foreclosure Fiasco Will Crush Home Prices

Home For Sale - Reduced Priced
Home For Sale - Reduced Priced

I've written a number of times about how the slow-down in foreclosures is likely to hurt home prices. So has my colleague Diana Olick.

Now new evidence is in, courtesy of the Los Angeles Times.

The Times observes that the California housing market is faring much better than the Florida housing market:

California home sales and prices have tapered off since the boost from federal tax credits for buyers vanished in July, but home values are up considerably from the worst days of the bust. The median price for town homes, condominiums and single-family houses in September was $265,000, up 20% from the bottom in April 2009, according to MDA DataQuick.

In Florida, prices in much of the state have struggled to find a bottom. The median price of a single-family home in Florida was $133,400 in September, a 48% decline from its June 2006 peak, according to data from the Florida Assn. of Realtors. Condominium prices have seen an even bigger plunge, with the statewide median hitting $83,400 in September, a 61% drop from its June 2006 peak.

Another closely watched indicator, the Standard & Poor's/Case-Shiller index, shows prices in Los Angeles up 10% from their bottom, San Diego up 14% and San Francisco up 21%. In Miami, home prices have remained relatively flat, up 2% from their bottom, and Tampa-area prices have yet to stop falling.

What explains the difference? In part, the LA Times argues, the speed of foreclosures. California is a non-judicial state, which means banks can foreclose without first going to court. (Of course, homeowners can still fight foreclosures by bringing the bank to court.) Florida is a judicial state, where banks need to go to court to get a foreclosure order. The result: it takes much longer to foreclose on a home in Florida.

"The average borrower in default lost the home after failing to make mortgage payments for 25 months in Florida and the other states where court approval is required for repossessions, according to a study by Amherst Securities Group. The average is 19 months in California and other so-called nonjudicial states," according to the Times.

What's going on here? Lengthy foreclosure processes mean the market takes longer to clear. Homes stay in weak hands or in limbo for longer. The total amount of potential inventory increases, holding down prices.

The robo-signing scandal, which forced several banks to freeze foreclosures and will continue to slow down foreclosures for quite some time, will make this situation worse. Of course, it's the banks who are to blame here—they were the ones who broke the rules. But it will be home owners who will suffer, watching the market stagnate for even longer than it would have otherwise.


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