The biggest asset held by most of us — the thing that makes us as wealthy as we are — is real estate. According to the Federal Reserve, in the second quarter of 2006 the net worth of our personal real estate, value less mortgages, was $11 trillion — that’s far more than stock ($5.4 trillion) or mutual funds ($4.5 trillion).
“Given so much wealth — and given such broad distribution — it’s easy to look at foreclosure statistics and pretty much believe they only impact other people,” says James J. Saccacio, chief executive officer of RealtyTrac, the leading online marketplace for foreclosure properties.
“If your house is not being foreclosed then why should you worry — especially if your home is mortgage-free or financed with a fixed-rate loan?” asks Saccacio. “If you look at the numbers it turns out there’s very good reason to be concerned.”
Consider why your home has value: It has a given location, size and condition. To get a home just like your house buyers will have to pay a certain amount of money.
But what if your home — with its ideal size, location and condition — was in a market where people suddenly didn’t have to pay so much? What if there was a surplus of properties? The value of your home would fall because less expensive alternatives would be available. The same tide that lifts all boats also lowers them.
Consider Texas. With 5.7 million people, Dallas-Fort Worth is the fifth-largest metro area in the United States. It’s got a good climate and a growing population.
But if you own real estate in Dallas the market is not so great. Why?
“So far this year, more than 35,000 homes in the Dallas-Fort Worth area have been posted for foreclosure. More than 15,000 homes have been taken by lenders when the owners couldn’t keep up with the payments,” says real estate columnist Steve Brown with The Dallas Morning News. “That means more than a quarter of the pre-owned houses up for sale in the Dallas-Fort Worth area are foreclosed properties.”
Look at real estate trends in Dallas during the past year and what do you see? Sales are down, according to the Real Estate Center at Texas A&M University. Dollar volume has fallen. Median sale prices are lower. The number of available listings is up. Days on the market have increased.
The catch is that foreclosures don’t just impact owners and lenders. In sufficient numbers, foreclosures impact you whether or not your home is for sale and regardless of how it is financed. As the example in Dallas shows, foreclosures can:
· Reduce the market value of your home, which means you may be forced to sell for less.
· Reduce your home equity if you are not selling which means you will be less able to refinance mortgages if rates decline or if you want to switch from an adjustable-rate product to fixed-rate financing.
· Lower home values, which means fewer dollars will be available from home equity loans to start a business or underwrite a college education.
· Create a buyer’s market where it may take longer to sell your home and where additional discounts and incentives may be required to close a sale.
Foreclosures in sufficient numbers have a community impact. They reduce the value of local homes, whether those houses are free and clear of all mortgages or financed to the hilt with the latest mortgage project.
“It may not be fair, but it doesn’t matter whether a home is being foreclosed because of illegal flipping, financial hardships or loans that are suddenly more expensive once ‘start’ rates end,” according to RealtyTrac’s Saccacio. “As soon as the number of foreclosures rises above a level that’s usual and normal for a community, home values across an entire area will fall.”
Consider a November 2006 study by the Baltimore-based Goldseker Foundation. It shows that “mortgage foreclosures have lowered housing values across Baltimore — in the aggregate — by just under $1.8 billion in the last two years (2004 and 2005). As of 2006, the estimated aggregate value of residential real estate for tax purposes in the city of Baltimore is approximately $17.8 billion, suggesting that between 5 percent and 10 percent of the value of residential real estate is lost as a result of these foreclosures.”
Since property taxes fuel local and state governments, the reduction in home values not only impacts individual property owners, it also reduces local revenues. According to the Goldseker report, Baltimore will lose $42 million in tax revenues during 2006 because of property value declines.
“What these figures show is that foreclosures are not just a problem for owners in financial trouble,” says RealtyTrac’s Saccacio. “We all have a stake in the effort to reduce foreclosure numbers for the very simple reason that a surplus of foreclosures can reduce the value of all homes in a given community — including your home and my home.”
Peter G. Miller is the author of The Common-Sense Mortgage and is syndicated in more than 90 newspapers.