Foreclosures Are Back

The temporary moratoriums on foreclosure filings, that the government pushed large banks to declare, has expired. So the backlog of mortgages that would have been foreclosed on during this period is on the way to completion. It seems that the "timeout" called by the government didn't help people find ways to pay mortgages they couldn't afford in the first place, who would've guessed?

These foreclosures enter the market as inventory, and will weigh down prices on the overall market (a big new chunk of supply), making a housing recovery difficult in the near term. But we have to do this. The "timeout" may have allowed people to breathe, but it did nothing to fix the problem. And sooner or later we have to deal with the basic fact that many people bought homes they couldn't afford to live in.

A touch over 800,000 homes were foreclosed on in the first quarter of 2009, with 5 states (California, Arizona, Florida, Nevada, and Illinois) accounting for 60% of the total. These are localized problems to some extent, and the locals feeling the pain have been very successful at making us think it is a national problem.

At the philosophical level, I seem to hear a lot of people saying that houses deserve to be safe investments. Homes should not get cheaper, period, ever. But that is crazy talk. The housing market is a large, flowing market with lots of money at stake. There is risk involved. And if we take that risk away, we will also take the rewards of smart investing away. There is simply no such thing as a risk-free market.

Buy a house at a bad price - and you'll lose money. This situation is basic. This situation is exactly what allows the other side of the story to be true as well. Buy a house at a good price - and you'll make money. Welcome to the market!