Foreclosures Provide the Bargains; Rising Rents & Interest Could Spark the Sales

Posted by Jim DeBellis on May 27th, 2011

Whenever I start thinking that the housing market can’t go any lower, I read the day’s news on foreclosure sales and remind myself that the real bottom, in terms of home values, lies at the bottom of the glut of bank-owned properties. RealtyTrak reported yesterday that 28 percent of U.S. homes sold in the first three months of 2011 were in foreclosure or already owned by the bank, and the price of these homes was 27 percent lower than than the price of homes that were not financially distressed.

When more than a quarter of all home sales are so far below regular market value, this of course is a drag on the valuation of the entire market. Now, at the current sales pace it would take three years just to clear the the inventory of 1.9 million foreclosed homes that banks are holding and processing today, and many more are in the pipeline. It stands to reason, then, that the market will continue to decline for several years.

The good news is that the seeds of recovery may lie within this downward trend. Even though prices and interest rates are low, smart investors tend to shy away from a bear market, especially when the bear could run wild well into the future. But investors can’t resist a bargain forever, and there are a couple of factors that could spur a gold rush before the foreclosures are cleared away.  In fact, foreclosures could be seen as the gem that is generating the bargains in the overall market, with the foreclosures themselves as the special prize.

It will be investors and not homeowners that will lead the increase in sales. So, although flipping may not be lucrative in a declining market, rising rents and a spike in the number of renters are already putting upward pressure on rents. This will be very attractive to investors who are willing to buy and hold as landlords.

The second factor is interest rates. Rates are so low, from a historical perspective, that a point or two rise in interest will still represent an exceptional deal. If it appears that rates are starting to creep back to the 7 or 8 or 9 percent rates of years gone by, then waiting for lower home prices could become a losing proposition. This is a case where an uptick in interest rates could really spark a buying spree among investors and homeowners alike, which could ignite the market and provide the demand that would stabilize and even increase prices.  You heard it first here!