Price Cutting Creating MORE Forclosures??
We have been hearing about a uptick in recent weeks for existing home sales. Most of it can be attributed to some agressive price cutting by banks trying to decrease the growing REO inventory.
The question is... will the recent aggressive action by the banks actually serve to increase the distressed inventory and not decrease it? The logic is as follows:
Assume we are in a newer HB area where homes sold for $300K a couple years ago. Further assume that most of the homes were sold in the last five years. Now due to a variety of reasons such as mortgage resets, job loss, and more, the banks have accumlated a significant amount of inventory in this area.
So over the past six weeks, the banks really started cutting prices.....let's say to $200K. When appraisers see a few foreclosures, they generally discount those and don't include them in the appraisal as a one off distressed sale. But when most of the sales are distressed, that becomes the market.
So now, all of a sudden, the new market value of those homes suddenly drops to $200K. The problem for those that must sell are now underwater. As a result, if they can't sell their house to cover the mortgage obligation, it increases the likelihood of another distressed home coming to market.
So as the bank lowers prices, it forces more homeowners into a distressed situation further leading to more defaults and ultimately foreclosures. As banks accumlate even more distressed inventory...................guess what happens to home prices as we move into the slower selling Fall/Winter season?