Are More Foreclosures Good For Housing?

In covering the RealtyTrac midyear foreclosure numbers yesterday, CNBC’s Maria Bartiromo posed an interesting question to her guests on the cable network’s Closing Bell program.

The question: Are Rising Foreclosures Good or Bad For the Housing Market?

Of course, the two guests took opposing positions on the question, which makes for good television I suppose.

One guest, Daniel Indiviglio, a columnist for Reuters Breakingviews, argued that quickly processing and selling foreclosures is actually the best scenario for the housing market going forward considering the two alternatives: continuing to push foreclosure prevention efforts, most notably loan modifications, that in many cases do not solve the root problem and result in nearly 50 percent of borrowers falling back into default or foreclosure; and slowly releasing foreclosure onto the market so as not to disrupt recent housing price gains.

Instead, quickly pulling the Band-Aid off with expedited foreclosures and subsequent sales of those foreclosed homes will help the housing market hit a true bottom more quickly, allowing for a quicker, more sustainable recovery in home values.

The other guest, Fred Glick, President of U.S. Loans Mortgage and U.S. Spaces, argued that rising foreclosures will make it more difficult for prospective buyers to get loans approved as more foreclosure sales push down appraisals. He suggests that foreclosure sales should not be included in appraisals to solve that problem and also improve the overall psychology of the housing market.

I tend to agree with the first guest, Indiviglio. In many markets, buyers, investors and real estate agents are hungry for more inventory, foreclosure or otherwise. RealtyTrac estimates that only 15 percent of the 629,000 bank-owned properties are now listed for sale. I think the banks would find if they were able to list more of those, they would sell many of them quite quickly.

I do agree with Glick’s comments about continuing to streamline short sales as well, but would add that short sales still have a negative impact on home prices. RealtyTrac foreclosure sales data for the first quarter of 2012 shows that the average pre-foreclosure short sale price was 21 percent below the average price of a home not in foreclosure.

What do you think? Would you like to see expedited foreclosures, short sales and bank-owned sales, or do you think more loan modifications and other foreclosure prevention efforts are a better path? Leave your comments in the comments section below.

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