Posted by: Timothy Ellis (The Tim)

Tim Ellis is the founder of Seattle Bubble. His background in engineering and computer / internet technology, a fondness of data-based analysis of problems, and an addiction to spreadsheets all influence his perspective on the Seattle-area real estate market.

30 responses to “Foreclosures Benefit a Neighborhood, Not Hurt It”

  1. Carl

    Excellent post. Foreclosures, unfortunate as they are for the owners, serve a valuable purpose in a free market. As the post points out, if the owner cannot afford the mortgage payments, the owner certainly cannot maintain upkeep.

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  2. MM

    Nice trick with different lighting. Pre-foreclosure photos has cloudy light but the post-foreclosure were made is a perfect sunlight. I like such deception. It’s also popular with people when they don’t smile before and they do smile after.

    The foreclosure has some effect on the neighborhood but it would be better to put more comparable photos.

    PS. Good you didn’t add Czech sky on the right photos.

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  3. No Name Guy

    The Tim: What you’re pointing out, at the local level, is the difference between Iceland and Greece (at the national level – in the former case, going through “foreclosure” and in the latter case, being bailed out / foreclosure forgiveness and still suffering the debts). To use a metaphor, in a ecosystem, its the difference between “let it burn / fire is healthy in the long term” and “out by noon / all fire is bad” mentality. Fire destroys, but it also renews by freeing nutrients trapped in dead material, clearing out undergrowth, and stimulating certain plants to drop seeds, opens up the canopy to allow light in, etc.

    As you show, the creative destruction of foreclosure is working to free up zombie / trapped assets for productive uses. In addition, as cruddy as it is for the individuals to suffer through, foreclosure takes that weight off their shoulders, relieves them of the debts and continuing call on their income, so that in the longer term, they’re able to reset the housing expense part of their finances to a more sustainable level. Sucks to be someone being foreclosed on now, ask ‘em how it is in 5 years to be free of the albatross.

    Clearly, as Las Vegas, Phoenix, et al show, the better way to get to a real, un-manipulated market is to foreclose, foreclose and foreclose some more – don’t dilly dally, just get it over with. Sell ‘em off by the bushel and let the chips fall where they may. The sharp knife cuts the quickest and hurts the least. Give the band-aid a quick, sharp pull, instead of a long drawn out slow removal.

    The next macro step that needs to happen in this process is for the Fed to quit artificially holding down interest rates. That’s fundamentally the root of this last housing boom and bust and the current boomlet. Until money / capital is priced right (e.g by earning a real risk adjusted return), the mal-investment will continue. The last boom was clearly mal-investment in housing stock (e.g. McMansions by the thousands in the middle of nowhere, condos by the bushel in Puyallup, etc) – the bust that followed was entirely predictable.

    The bust that will happen when the Fed either wakes up to reality or is forced to, nay, loses control of interest rates will be ugly. It’ll look like the Yellowstone fires – everything was fine, right up until it wasn’t when that lightning bolt hit. But then again, we reap what we sow. The Yellowstone fires were the result of decades of fire suppression, leading to a build up of fuels that made a catastrophic firestorm inevitable. The economic turmoil that will happen when interest rates are forced up will be similar as there is so much bad debt and mal-investment in the economy it isn’t funny. And that’s when there will be metaphoric blood in the street and it’ll be time to buy for those who have their finances in order (e.g. out of debt, living well below their means, with a strong work ethic and diverse skill set and multiple streams of income) and resources salted away.

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  4. Ira Sacharoff

    Tim wrote:
    “In fact, I contend that foreclosures benefit a neighborhood, and areas that have experienced the most foreclosures are poised to improve the fastest during a recovery.”

    So, just to clarify: Are people wasting their time buying houses in Sammamish and Queen Anne and should be focusing on White Center and Skyway instead?

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  5. mike

    I’ll add two caveats though – this is a phenomenon most apparent in older neighborhoods where the homes are still worth fixing. Foreclosures in newer neighborhoods aren’t as likely to turn into the nicest house on the block as they are to accelerate the depreciation of the other newer homes nearby. Sometimes these cheap newer homes are the gateway for riff-raff to move in.

    Personal anecdote – I went to look at a used car being sold in a newer “million dollar plus” neighborhood. Much to my surprise the guy had recently bought the place as a foreclosure for half off, and set up small car dealership in the home. He had used cars parked all up and down the streets of this former luxury community. I can’t imagine the neighbors looked at this as any kind of improvement.

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  6. David Losh

    The price the foreclosures sold for is the price of the property.

    The price the next sucker paid is the inflated price based on Real Estate marketing hype, like this post.

    Those dumps are still dumps, and the price of the remuddling is what ever that remuddling is worth to the buying public.

    Some people are stupid to pay more than remuddling is worth.

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  7. Feedback

    Thank you, Tim. You’re smarter than the so-called reporters of MIT, Yahoo! News, and NBC News.

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  8. whatsmyname

    By MM @ 2:

    Nice trick with different lighting. Pre-foreclosure photos has cloudy light but the post-foreclosure were made is a perfect sunlight.

    MM, Don’t be silly. Foreclosures create sunny skies. Just look at AZ and NEV.

    Tim, You may enjoy the new paint and trim this year, but an increasing concentration of SFR rentals does not bode especially well for the future quality of your neighborhood.

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  9. aerojd

    Great post, The Tim. I have seen a similar trend in my neighborhood, and with the exception of properties being renovated to become rentals, would agree with the point of the post. Nothing against older folks, but you can point to the 3 houses on my street which are in the most degraded condition – peeling paint, aluminum foil taped inside the windows, junk on the back porch, weeds 2 feet high . . . you get the idea, and you will find each is owned by a widow or very old couple. Long since paid off, the houses have no mortgage payments and as long as the owner can pay property taxes, they will live in that home until someone carries them out. The houses that have turned over have been upgraded and are nicely kept up.

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  10. softwarengineer

    Best Post You’ve Had On Seattle Bubble This Year Tim

    You can argue against lower prices if you paid too much….but let’s face it, upkeep on homes is VERY COSTLY and maintaining nice neighborhoods doesn’t mean high mortgage payments. Its the opposite.

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  11. 3rd Generation

    7. David Losh

    Re-read your post.

    YOU should be very careful who you call stupid.

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  12. Erik

    This is kind of a weird post. Foreclosures bring down home value because banks sell them for less than fair market values. After they are sold is when recovery happens. I’m not sure what is so hard to understand about that.

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  13. doug

    We are in the “Catch a Falling Knife” phase of the real estate market. Foreclosures will now start appearing en mass as the stock market gold real estate and oil crash all at the same time. MASSIVE ECONOMIC COLLAPSE IMMINENT.

    The only really good investments are food stocks and the us dollar.

    I hereby declare the real estate market dead and about to go down everywhere very very fast.

    You will see how great foreclosures in your neighborhood are when the renters or should I say rip offs move in,,,,,,,,,, the jig is up.

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  14. whatsmyname

    RE: The Tim @ 10 – I am glad to hear it. I must admit that the house on 36th used to look like a wild west saloon. Now It looks like a cheery country gas station and general store.

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  15. redmondjp

    RE: Erik @ 14 – Define ‘fair market value.’

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  16. mike

    The other side of this coin is if the neighborhood has too many pre-foreclosures where people have lived rent free for a while, average quality takes a big dip.

    Depends on the hood, but the areas that dropped significantly in value have a lot of owners that threw in the towel years ago. These homes may turn around if the area has some quality that draws new residents. It’s still a gamble.

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  17. Dirty Renter in Banjo Country

    By whatsmyname @ 9:

    By MM @ 2:
    Nice trick with different lighting. Pre-foreclosure photos has cloudy light but the post-foreclosure were made is a perfect sunlight.

    … an increasing concentration of SFR rentals does not bode especially well for the future quality of your neighborhood.

    I resemble, uh resent, that remark.

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  18. Erik

    RE: redmondjp @ 17
    Based on comps.

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  19. David Losh

    RE: 3rd Generation @ 13

    So again you have nothing to say.

    Dispute what I’m saying if you would like, but the cost of “fixing” a property doesn’t translate into value.

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  20. Erik

    RE: David Losh @ 21
    I agree with David. I think the key to fixing a property and reselling it is to not buy an old house where you may have to redo the plumbing, electricity, etc. Buy something that needs drywall, paint, and other designer things. The general public buys off of the feeling that a home gives them.

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  21. Young Gun

    Tim, I have had this opinion for years. A lot of these homes are eye sores of the neighborhood. My dad and I bought a 4000sq ft duplex in your stomping ground (34th and Hoyt) in 2006. The house was a mess, if you could even see it. We made that thing look pretty good. Its probably the nicest on the block. Before that I heard there where prostitutes living there and a bullet whole or two. Every house I have bought and sold or rented, I have felt like it made the neighborhood better. I like the article!

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  22. David Losh

    RE: Young Gun @ 23

    There is a difference in terms of improving a property, and flipping it.

    We also feel that we have contributed to several communities by improving run down properties.

    The problem here is that pricing in many cases doubles when that pricing is hot market driven rather than based on economic realities.

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  23. ARDELL

    RE: David Losh @ 24

    I think what we have historically perceived to be economic “realities” has changed and will not change back. I noticed that when you and I met in person. You were dead on right. But real estate is a “market” and markets change over time based on what buyers do, whether they do what we think they should or not.

    When buyers en mass value shiny objects more than land value &”good bones”, then the price of shiny objects goes up, same as gold. If no one ever wants anything else gold, and gold teeth are definitely out of style haha, then the price of gold goes down.

    If people want to pay twice the price for a granite counter if it is in the house, that is their right, and that becomes “the market value” of that granite counter in the home. Not the price it cost to put it there.

    This has always been true in new construction. In markets where there is no land to build a new house, this new stuff premium is becoming a reality for the resale markets.

    Economic “Realities” are not a constant over time.

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  24. David Losh

    RE: ARDELL @ 25

    The reality is that gold will stay shiney, and housing units get beat up.

    We go into many homes that are less than five years old that need a lot of work.

    On the other hand we were taking out some cabinets yesterday that were from the 1950s and they were solid wood. We can’t removed the tile because it’s set in an inch of concrete.

    Then we have the issue of what is a tear down based on the economic viability. both of the community, and property.

    This market is being driven by cash, and lots of it. If I had a billion in cash to invest in Real Estate I would buy Germany, Japan, or even China just as soon as things became desperate enough.

    The United States was only the first wave of economic default, because we can declare bankruptcy. Our consumers came out with a ding to credit, and the ability to buy again.

    Now that we have filled the banks balance sheets they would be dollars ahead to move that cash to South America, Mexico, or parts of Africa to invest.

    The United States is only a safe harbor for cash. Real money will be made in emerging markets.

    So, because I only have two comments left, I will say that yes, our market has changed, and people should be smarter than buying granite counter tops than a home that has economic viability.

    Oh yeah, and renting is getting to be a better deal all the time considering how much debt you need to take on to buy a house.

    Last is that the United States has one residential housing unit for every two people in the United States, and we are building more. The cycle to put an apartment building in service is three years, we started building in 2009, 2010, those units are becoming available now, and we have more in production.

    All economic indicators that I look at say we are over supplied in residential housing units, so where is the panic buying coming from? Banks, who now control the market place.

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  25. Ira Sacharoff

    David and Ardell are both right.
    Ardell is right in that market value is determined by what people are willing and able to pay.
    David is right in that the economic fundamentals don’t justify the current overheated market.
    And that the construction materials in the old days were built to last. Today’s construction materials are built to look nice and wear out quickly.
    Ardell said that economic realities are not a constant over time. That’s very true. Things don’t stay the same, but people think they do. Inventory is brutally low right now, so people think that they’ll never be able to buy a house unless they get one now. It doesn’t make a lot of sense, but the real estate industry and the news media is great at manipulating people’s primitive urges. Over the long term, I think the real estate market reverts to reflecting economic reality. Over the short term, not much at all, and now is one of those times.
    Speaking of foreclosures, and I wish I could find the link, but in a lot of cases banks have offered money to get people to leave their foreclosed on and short sale homes, and according to the article I read, people are receiving checks from the bank that bounce

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  26. ARDELL

    I’m not a big fan of bringing Japan into the room in a Seattle real estate conversation, but I hear that in Japan people ONLY want NEW and it is near impossible to sell a “used house”.

    Perhaps the American Way of building to last will change, and did somewhat in the early 90′s. From David’s comment: “We can’t remove the tile because it’s set in an inch of concrete.”

    The trend changed in 1993 or so to not using anything of color that would last a long time and be hard to remove in homes. The earth toned pea green and chocolate brown tile has all been replaced with shiny objects that are more neutral.

    The expectation that a kitchen and bath will be remodeled every 8 to 12 years is built into today’s “economic reality”. Any talk otherwise is like grandpa saying” Well, when I was a kid we knew the value of…x”.

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  27. David Losh

    RE: ARDELL @ 28RE: ARDELL @ 25

    Let me say this about that.

    We have rehabbed lots of houses, and a few years ago I would argue for keeping the old houses.

    Today I am much more inclined to say tear a house down, and build a new one in its place. I’m also a bigger fan of condos, apartments, and apartment complexes. My niece, and a good friend are apartment complex managers. They have great amenities, like a pool, sauna, billiards, movie lounge, open spaces for bar b ques, and play grounds for the kids.

    South Lake Union, as much as I disliked the idea of all that development, has turned out to be a great place, especially on summer evenings, it’s vibrant.

    You are right, that in terms of a new construction, if built, and finished well, you can tear out the old, throw it away, and have new, with little fuss. They even make components fully recyclable.

    In terms of my thinking, yes, the realities have changed, but that is just my opinion, which might change if some one convinces me.

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  28. Reader Question: What About the Upside of the Bubble? • Seattle Bubble

    [...] an interesting observation that is similar to my post from last week: Foreclosures Benefit a Neighborhood, Not Hurt It, only from the pre-bust [...]

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