Do Foreclosures Make a Downturn Worse?

 In All About Houses, Home Mortgages

It’s no secret that with an economic recession comes an uptick in foreclosures. But, can this wave of foreclosures actually make an economic downturn worse? Researchers at Boston University and Stanford University think so. Experts are currently publishing studies about how foreclosures exacerbate a housing crisis and actually reduce prices for homes that weren’t previously at-risk. 

Here are their findings. 

Foreclosures cause stress on lenders, especially on the loans that had not yet been sold to major mortgage giants. Ipso facto, the available funds that would have gone to new buyers instead went to cover foreclosed properties. The result of this is lenders needing to be more cautious and more mortgage applications being outright denied. When buyers are denied, sellers are forced to drop their prices to appeal to the few buyers that remain. This effect is called lender-rationing. 

Another hiccup is that homeowners who have gone through a foreclosure are flagged by credit bureaus. Evidence of a past foreclosure may make it harder (and sometimes impossible) to secure a loan in a future purchase. Those that are left that actually qualify for a mortgage are faced with a huge list of homes often sold at a major discount. When these buyers can be more selective, it drives down the price of homes not in foreclosure. 

So there you have it. A recession doesn’t necessarily mean lower home prices and more buyers. Sometimes it means exactly the opposite!

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