‘Clearing Market’ is Good News, by Mark Dotzour, The Real Estate Center

During 2009 and 2010, the federal government was being encouraged to “do something” about the large number of families that were delinquent on their home mortgage.

I’m sure that some of the people in my audiences then thought that I was very calloused and uncaring. But, being from the “old school,” I was suggesting at the time that the housing market would not return to normalcy until these houses were actually foreclosed and sold to other buyers.

In a free market, this is referred to as “clearing the market.” Until the market clears, there is much uncertainty about the overhang of potential foreclosures. Buyers are hesitant to purchase, unless the discounts are substantial, because of concern about what happens when distressed homes finally come on the market.

Looking back, we see that this logic holds. Housing markets in states with nonjudicial foreclosure have recorded a strong rebound in prices. States like New York, New Jersey, Florida, Illinois and Nevada are lagging behind.

In my presentations back then, I suggested that our housing market has always been resilient. This is how the market has always worked:

  1. You miss your payments; you get foreclosed upon.
  2. You move into an apartment and rent for several years.
  3. When your credit is repaired, you buy another house.

This logic still holds today.

Here’s a real life story of how the market works. I was speaking in Las Vegas a few days ago to some commercial Realtors. I mentioned how the housing markets were finally clearing except in areas that had restrained the foreclosure process.

After the speech, a young woman in her 40s came up to me and said she had filed for bankruptcy in 2010. She said she cried for a week before finally going through with it. She lost her business in the process.and now works in the commercial real estate industry.

She wanted me to know that she had just bought another house. She was so excited and proud of the fact. She said she bought the house for $160,000. Initially the lender wanted a down payment of $17,000, but at closing, reduced it to $7,900. It was a conventional loan at current interest rates.

This is really good news for the housing market. Thousands of people lost their homes through foreclosure in the past eight years. For several years after foreclosure, it can be hard to get a mortgage to buy another house. But the calendar pages just keep turning. Many of these people that have been shut out of the market to buy a home because of foreclosure or bankruptcy are coming back into the market.

Capitalism works. The free market works.

What is the market? It’s simply the amalgamation of the decisions and thoughts of millions of buyers and sellers each day. Government intervention can postpone reality, but in the end, the market will clear. The quicker this happens, the quicker we are on the road to recovery.

I hope we don’t forget this next time.

The Real Estate Center, Texas A&M University

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