Reader Request: Are Foreclosures Good?

A reader asks: I read your comments about the need for an improvement in the housing market before the economy can improve. I live in a community of 900 single-family homes. Prior to the collapse of the real estate market in 2007, we had an occasional foreclosure and resale. The buyers of foreclosed homes appeared to move at breakneck speed to repair broken window panes, patch driveway potholes, replace dead shrubbery, and bring maintenance of their newly purchased homes up to high community standards. Since the commencement of a program to help struggling homeowners to remain in their homes, we have about 10% of our homes occupied by assisted homeowners with lowered mortgage requirements. The owners remain in possession of their homes, but they lack the funds required to improve their appearance. The result is that the 10% of poorly maintained homes lowered prices for the 90% of homes that are in good condition. Is this the solution to our problems suggested in your remarks?Foreclosures lower prices. They increase the inventory of unsold homes, putting pressure on sellers to get rid of them. The longer they sit on the market, the more they deteriorate. As they force prices down, homeowners start owing more than the house is worth, and they stop making payments, resulting in yet more foreclosures. It's a vicious cycle, and it affects the entire neighborhood.One study from the 1990s found that, if you lived in Chicago, each foreclosure within an eighth of a mile of you lowered the value of your home by 0.9 percent. A more recent study found the effect to be even stronger during the 2008 crisis. Foreclosed properties in Massachusetts sold for 27 percent less than similar non-foreclosed properties. These foreclosures tended to pull down the prices of neighboring houses by $192,000. Many other studies have confirmed this effect.So, if foreclosures have increased the value of homes in your neighborhood, you are a very fortunate exception to the rule.And, if you've been disappointed by the poor maintenance of some of your neighbors, keep in mind that that ain't nothin' compared to the deterioration that usually follows foreclosures.Even more important than such "spillover effects" is the direct effect a foreclosure has on the family being kicked out of their home. According to one recent study:

...an increase of 100 foreclosures corresponded to a 7.2% rise in emergency room visits and hospitalizations for hypertension, and an 8.1% increase for diabetes, among people aged 20 to 49.Each rise of 100 foreclosures was also associated with 12% more visits related to anxiety in the same age category. And the same rise in foreclosures was associated with 39% more visits for suicide attempts...

Of these foreclosure victims, 2.3 million are children. According to a recent report, another 6 million children are at risk of being thrown out of their homes, if we continue to allow this foreclosure spiral.This suffering is unnecessary and unproductive. It lowers the value of our homes, it prolongs our economic weakness, and it is, by any reasonable standard of justice, just plain cruel.Much of it, moreover, is downright illegal:

As Michael W. Hudson documents in his behind-the-scenes book The Monster, these multibillion-dollar mortgage empires grew at astronomical rates by purposely hiring inexperienced salesmen whom they could “brainwash”; teaching them how to find and take advantage of uneducated, vulnerable borrowers in financial distress; ordering them to lie to, spy on, and hide critical information from borrowers; creating a culture that encouraged salesmen to forge documents and lie to regulators and underwriters; and firing anyone who didn’t employ as many of these unethical and illegal tactics as possible to increase loan volume.These were expert con artists, perpetrating fraud on a level unseen since the vicious dog-eat-dog days of the late nineteenth century, back when consumers couldn’t even trust food not to poison them or medicine not to kill them. Unrestrained capitalism is a dirty business.Corporations want us to believe that they will regulate themselves, that no firm with a reputation for shoddy products will stay in business for long, but we’re not that stupid. Our eyes are open, and the millions of fraudulent loans make it impossible to look away.The Monster is to our generation what Upton Sinclair’s The Jungle was to an earlier age: a warning, a call to action, a witness to injustice so widespread that the reader is continually shocked at how human beings can be so cruel, so callous, so sociopathically greedy.

Surely no harm can come to the value of our homes from prosecuting these criminals. Indeed, bringing them to justice is the one of the best ways to prevent a recurrence of this disastrous crisis.