When the ‘foreclosure price’ becomes the market price


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This lengthy update on the housing price collapse in Merced, written by the New York Times’ David Streitfeld, is worthwhile weekend reading. As with all good writing about the housing bubble and bust, the story, in the end, is pretty simple: In Merced, planners, developers, lenders and buyers were blinded by the bubble -- they approved, built and bought thousands of relatively expensive houses that the area’s economy ultimately could not absorb:

Hardly anyone in Merced planned very far ahead. Not the city, which enthusiastically approved the creation of dozens of new neighborhoods without pausing to wonder if it could absorb the growth. Certainly not the developers. They built 4,397 new homes in those neighborhoods, some costing half a million dollars, without asking who in a city of only 80,000 could afford to buy them all.... And, sadly, not the local folk who moved up and took on more debt than they could afford. They believed — because who was telling them differently? — that the good times would be endless.


You know the rest of the story: a tidal wave of foreclosures, driving median sales prices down 50%. The ‘foreclosure price’ -- set by banks eager to unload distressed inventory -- has become the market price; other sellers must compete by dropping their prices. A downward spiral in prices.

A typical foreclosure price progression: ‘In November 2005, the house sold for $126,000. The bank, which took it back last spring, is asking $59,000. The Seattle man (a prospective buyer) offers $40,000.’

Another foreclosure scenario: ‘The owners, who owe $350,000, can no longer make their mortgage payments. Mr. Seivert is negotiating to buy the house for $170,000 and then rent it back to the couple, who have jobs in the area. They will pay $1,100 instead of their current $2,600 a month.’

--Peter Viles
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