Foreclosures are like cancer, you don’t judge the danger just by number of cancerous cells.

The impact of foreclosures: The pricing of houses is determined by transactions not houses unavailable for a transaction. Typically the number of transactions in an area (not new developments) is much less than 1 in 45 per quarter. What that means is that larger the number of foreclosures, larger the number of transactions related to a foreclosure which tends to bring down the price significantly. That means the rest of the 44 homes get valued lower (if any of them want to sell and some of them will or may sooner or later). But then some of these 44 will have gone under water and they cannot sell. Some of them decide foreclosure is a better option. It is a snowball effect and over time can potentially affect everybody except those that have no mortgage which is a very small percentage. And even those cannot count on it for their retirement with depressed prices.

The reason you do the comparison YoY is to avoid any seasonal fluctuations. What matters is whether foreclosure inventory is building up and not sold. As long as that condition exists, prices will drop in huge chunks and will drag more people off the cliff. And this has a seasonal variation. People who are under water and decide to do so may not want to do it in the middle of winter and may wait until warmer weather. That is why these rates go up and down.

It will improve only when the foreclosures completely stop. The next step is pricing determined by supply and demand of non foreclosure houses which may still continue down because of the huge inventory (but not necessarily as drastically as foreclosures). Unemployment doesn’t help either. And if this continues to decline, it will set off more foreclosures as people go under water again.

Foreclosures are like cancer, you don’t judge the danger just by number of cancerous cells.

- CommonMan

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