The Foreclosure Zombies of Mass Destruction

© 2007 Denise Gibbs/Typecast Pictures’ Zombies of Mass Destruction

THE ZOMBIES ARE COMING

The foreclosure zombies are coming – coming to a neighborhood near … yours.

At first, they were an insignificant speck. You could be forgiven if you stepped over (or on) them when they crossed your path. But the undead gradually infected more and more of the living. Now, they are ready for their furious mass attack. The proof is in the charts.

Figure 1: Number of CA Home Sales, Organic & Foreclosure Related

Figure 2: Percent of CA Home Sales, Organic & Foreclosure Related

Figures 1 & 2 are based on ForeclosureRadar.com data from the Field Check Group’s April 16^th report, graciously provided by Mark Hanson. The Field Check Group divides California home sales into two groups:

• Organic Sales: From “Ma and Pa Homeowner” – that composed virtually all of the real estate market until 2006; and

• Foreclosure Related: Sales of bank-owned properties, acquired through foreclosure. They are sold, through real estate agents, on the banks’ behalf.

As Figure 2 demonstrates, foreclosures now account for more than half of California home sales, and Mark Hanson observes that this holds true for “most other bubble states.”

Two questions remain:

1. What can stop the foreclosure zombies?
2. What is the cost of their attack?

Question #1: HOW CAN WE STOP THE ZOMBIES?

Based on prior government policy, the answer to question #1 is easy. All that we need to stop the foreclosure zombies are wishful thinking (foreclosure moratoria) and ineffective modification programs (in which more than half of the “saved” will eventually succumb). See my Jawbone for the details.

Question #2: HOW MUCH DOES THE ZOMBIE ATTACK COST?

The answer to question #2 - the cost question - is more difficult. Luckily, J. Y. Campbell, S. Giglio, & P. Pathak (of Harvard & MIT) have just released Forced Sales and House Prices: NBER WP 14866 © 2009 – which examines this question.

Their April 2009 paper uses data on Massachusetts’ residential real estate sales over the last 20 years (1987 – 2008) to show that:

• Houses sold, after foreclosure, are sold at lower prices than other houses. Foreclosure discounts are large and average 28% of the value of a house; and

• Foreclosure sales that occur near properties sold in non-foreclosure-related transactions lower the price of the other properties by about 1%.

To see, very roughly, what these findings mean for reported California home prices (IF they applied to the California market), consider the median home prices as reported by the California Association of Realtors® in Figure 3, below.

Figure 3: Median California Home Price (Source: California Association of Realtors)

Once adjusted for the a) foreclosure discount, and b) foreclosure proximity discount, I believe that prices would look something like this:

Figure 4: California Home Prices, Reflecting Foreclosure Impact

As indicated, the blue “Median CA Home Price” is the original series as reported by the California Realtors®. The red “Home Price Foreclosure Sales” series reflects the28% foreclosure discount. Finally, the green “Home Price, Not Sold In Foreclosure” series reflects the price that sellers might have received if they did not reside in foreclosure prone neighborhoods. Also note the following:

• When the CA home sales market had been dominated by organic “Ma and Pa Homeowner” sales (pre 2007), the blue median home price line hugged the green “Home Price Not Sold in Foreclosure” line.
• As the foreclosure zombies grew to command more than half of the market, so did their influence upon the median, and the blue line gradually descended towards the red “Foreclosure Home Price” line.
• At last report, with zombies at about 60% of the market, median prices (at about $250,000) are now $50,000 below the $300,000 “uninfected” no-foreclosure price.
• Finally, Figure 4 pegs the current median sales price of an uninfected zombie-free home at about $300,000. The price of a home captured by foreclosure zombies is about $90,000 less, at about $210,000.

Here’s some advice for my uninfected California readers - you know who you are – the lucky 40%. Lock your doors, guard your homes, and protect your families. The foreclosure zombies are coming. Flee while you can still view the dawn. You have nothing to lose but your equity.

Comments

[Tom Armistead:]

This is good: facts with sources cited, accurate interpretations, logical conclusions.

Apr 20 09:26 AM

[Jimmy K:]

unless you shoot them in the head, Zombies will keep coming after you...

Nice article, I think you nailed it. When do you expect the "National" foreclosure moratorium to commence?

Apr 20 09:40 AM

[D_Virginia:]

Good article.

And with unemployment still rising at a painful rate and Interest Only ARMs still resetting in mass numbers through 2012, there will be more and more foreclosures to come.

Apr 20 09:57 AM

[Allamad:]

Buy at the funeral, sell at the wedding. The incentives for buying a home now in California are unbelievable. Housing prices in the L A area have leveled off for the last three months. I'm a tax preparer, almost every young couple I see are trying to scrape together a down payment to buy a home and get the free $8000 "gift" from the government and possibly the free $10000 CA tax credit for buying a never occupied home. They know something the analysts don't--when the government rigs the game in your favor, take advantage.

Apr 20 10:10 AM

[beautyseer:]

Make the banks that made this mess take the pain. Support National Morgage Debt Forgiveness Day!

Apr 20 10:12 AM

[campo:]

Foreclosure moratoriums will just fester the problem and create a long-term bear in housing. We need a reset of real estate values anyway. The "Buckleys" approach provides the short-term pain and sets up a return to long-term gain. If you are upside-down in a home right now, and you have no other assets, then your best move is to stop making your payments and live in your place rent-free until they kick you out. Save the money you would otherwise be using for payments, and use it to start over when your ass is on the street.

Apr 20 10:35 AM

[whidbey:]

In the larger context this points to more systemic failure in banking and the notorious GSEs which are begging for more capital. I suspect the only fix for this problem is to give the GSE more capital and let them directly underwrite the sale of foreclosures, and if required resell them to the public directly.

Following in train are credit cards, and commercial real estate.

Apr 20 11:43 AM

[ArkansasAngie:]

The moratorium is over. Foreclosures jumped in March. You can expect April's numbers to be in the same neighborhood -- bad.

The good sign I see is that banks are beginning to make deals -- read take their losses.

I've seen a couple of referrences to foreclosured homes being in such bad physical shape that it isn't worth rehabing them to sell. Has any of ya'll send any hard documented reads on this? I'm inclined to discount this to a not very important level.

Apr 20 02:30 PM

[Fred W:]

Home prices are still based too much on what WAS, rather than what IS. The housing Ponzi scheme that was set up by vote-hungry politicians and greedy lenders, where home prices can NEVER fall, is over...why extend it with government subsidies??
The party is over...drinking more KoolAide will only delay and intensify the morning after--fyi: we haven't seen the worst yet.

Apr 21 10:12 AM

[EttU:]

What is now important is to make sure that a very large number of home builders go out of business. First it will help clean out all those who should never have been in business and secondly and most important will help stop house builders from destroying the best agricultural land in the world by not being able to continue to purchase agricultural land and put it under concreate.

The cities and towns which allowed building and more building are as much at fault as are the contractors, banks and buyers who purchase houses they could not afford.

Apr 21 03:30 PM

[Gedankonomist:]

And the only way that will happen is if the government keeps it's big nose out of the market. I remember back in the 90's the government pulled the plug on the "Superconducting supercollider" project which was to be a giant subterranean particle collider. But the project was not stopped before they had built the circular tunnel a mile or so in radius. Last I heard, it became a giant mushroom farm. So, who knows? Perhaps there is some agricultural use for all these empty plywood mcmansions. Stock the swimming pools with fish?

On Apr 21 03:30 PM EttU wrote:

> What is now important is to make sure that a very large number of
> home builders go out of business. First it will help clean out all
> those who should never have been in business and secondly and most
> important will help stop house builders from destroying the best
> agricultural land in the world by not being able to continue to purchase
> agricultural land and put it under concreate.

Apr 21 04:03 PM