In January 2009 I wrote about the foreclosure snowball. We all know the story about the heated real estate market, the popping bubble and the resulting foreclosure and economic crisis. Foreclosures have dragged prices lower which in turn created more foreclosures which again lowered prices which again caused more foreclosures and so on.
Foreclosures will continue to put a drag on prices until their numbers decrease. Distressed sales make up around 45% of the Sarasota Florida real estate market (the percentage of distressed sales in the luxury markets like Siesta Key, Longboat Key, Casey Key, Bird Key and Lido Key are much lower).
So when does the foreclosure snowball stop rolling?
1) The economy and confidence
The economy needs to improve. People are hoarding any money they have and are reluctant to spend it. When the economy improves people will become more optimistic and more likely to spend money. This will bring more home buyers to market. More home buyers equals more sales and lower inventory. A renewed level of confidence will also keep some people in their homes who might otherwise quit paying thus decreasing the number of foreclosures.
No one is going to buy a house that does not have a job. People worried about losing their jobs are most likely not going to buy a home either. When the economy improves and companies start hiring again then the home buyer pool will increase. A lower unemployment will most likely decrease the number of foreclosures. Home owners that are upside down in their house might be more likely to hang in there and keep paying the mortgage if there is renewed confidence in the real estate market and economy.
3) Home prices
When home prices fall to the point where an investor can buy a home and break even or have a positive cash flow then that is the therotical floor to the real estate market. I believe this theory only applies to homes on the lower and middle end of the price spectrum and not luxury properties. A $5,000,000 beach front estate is not going to fall to the point where you can rent it out and break even. The dynamics of that market are different.
Here in Sarasota, Florida you can find homes where the revenue covers the expenses. We have not seen that in a looooong time. Those properties are being purchased by end users and investors quickly. That seems to be the floor in prices.
None of these things will happen over night. We have been in this for a long time now. I saw home prices starting to slip in 2006. That was nearly 5 years ago. It seems like we are on the tail end of this mess with perhaps a couple of more years to go. I can't see prices going that much lower but you never know.
It seems to me that home prices are low enough and are very affordable. What we need now is a larger buyer pool. This will only happen when the economy improves, jobs are more plentiful, lending guidelines loosen just a bit and the overall consumer confidence is higher.