Foreclosures are hitting the real estate market like a hurricane smashing into New Orleans. What at first seems terrible can also have the potential to improve things in the long run. I realize that foreclosure is painful in any situation but it is serving an important function and getting rid of may of the bad loans that were made during a period of underhanded market speculation. Foreclosures are also getting many people out of bad loans and while they may hurt in the short term they will be beneficial in the long term.
Lets look at a simplistic view of what people thought would happen in the real estate market. It was expected that people would buy real estate and that real estate would appreciate in value, leading the owners to be able to sell for a profit. They would in turn reinvest their money into bigger more expensive property. A revolving door of sorts was expected to happen, with people always winning.
What happened though, was that as people bought more expensive homes they also took out greater mortgagees causing more stress and putting themselves at more risk. Banks also went out on a limb and would finance homes that were above what people could expect to pay. On the other end as prices rose first time home buyers found themselves priced out of the market. Bankers responded by making the loans anyway and buyers took dangerously creative loans that often hid the true cost of ownership and ultimately lead to foreclosure.
This pricing out effect caused sales to drop despite bad loans and people were left holding expensive property that they wanted to sell. Not only to move into a bigger better house but also to stay one step ahead of the adjustable rate mortgage or ballon payment. With few new buyers many people found themselves stuck with expanding mortgages and no way to get out.
This lead to a ripple effect that hit the entire real estate industry. The health of the real estate market can be gauged by how many new home buyers are entering the market. If there are no new home buyers this effectively shuts down the entire market.
When the market shuts down this is bad as you may have expected. And, ultimately leads to the tightening of credit as we have recently seen. This particular economic slump was a perfect storm of sorts. With new home buying coming to a stop and many mortgages defaulting at the same time. This in turn effected the market as a whole.
I am oversimplifying a bit but to tell the truth the greatest economic minds in the country will be attempting to tell us exactly what happened for the next century or so. What I know now is that there are more foreclosures available than ever before and that the real estate market is still king.