The wise King Solomon had much praise for the just – people who deal fairly with others, speak truth and deal equitably in business. Among his many proverbs in praise of the just, he says in Proverbs 10:16: “The work of the just is unto life, but the fruit of the wicked unto death.” As the King explains in the several proverbs that reflect on the virtues of justice, dealing justly with others can take many forms — including investing in real estate. And one way to be a wise and just investor might be to purchase foreclosure properties – a move that can impact not just individual neighborhoods but also the local and national economy.
The repeated waves of housing foreclosures that followed the housing collapse of 2008 – and which are still trickling onto the market – have an economic impact far beyond the immediate consequences for the homeowners affected. From whole neighborhoods and the people who live in them, to the local and national economies, the foreclosure epidemic has a cost – and in some ways the hidden aspects of that cost are only now becoming clear.
As virtually everyone knows, the flood of foreclosures began to hit the housing market after the subprime mortgage crisis of 2008, when record numbers of homeowners found themselves unable to make the payments on a mortgage that had seemed so easy to get. Those foreclosure actions, and the ones that followed, put thousands of ex-homeowners into rental housing – in many cases, permanently. The houses themselves entered the housing market in several ways –as traditional individual listings, on auction, or in bulk sell-offs by lenders such as the government’s Fannie Mae and Freddie Mac. From there many were snatched up by investors looking for low-cost properties.
But the consequences of foreclosing on a property went beyond the individual homeowner. According to ERate’s Broderick Perkins, large numbers of foreclosures in an area takes a toll on the overall economy of a neighborhood or region. The presence of these foreclosed homes raises a red flag to would-be developers and providers of services, signaling an area headed downward, with no hope of a quick recovery. That creates a vicious cycle of vacant foreclosed houses in a blighted neighborhood, which leads to less development and more foreclosures and abandonment.
Other hidden costs of foreclosure have also been documented. Among them: increased crime rates in areas with high rates of vacant, foreclosed homes, poorer physical health among those who have lost homes to foreclosure, and even poorer school performance among children whose families have gone through foreclosure and the resulting upheaval. And, since for many people, a home has been a key piece of inheritance, a foreclosure also impacts generations beyond the immediate family facing the loss of their home.
Some areas, particularly those in relatively depressed areas, face a harder struggle to get help such as mortgage debt relief or refinancing help too, making foreclosure a more likely outcome than a bailout. And while these former homeowners contribute to the burgeoning rental market, credit and income problems continue to dog them for years to come.
As many housing industry observers have noted in the past few months, the foreclosures just keep coming – although not at the frantic pace seen in the early days of the mortgage meltdown. Because of slow processing on the part of the courts and lenders who got their wrists slapped for mortgage fraud during the robosigning period, some of those original cases are still hitting the market. Others are showing up as part of bulk sale packages offered to selected investment buyers, usually large investing groups. And, because a lot of people are still struggling with their existing mortgages, new foreclosure cases continue to come up,
All this, combined with relaxed rules on making short sales to get out from under a mortgage problem, means that the ancillary effects of the foreclosure process are going to continue to impact families and neighborhoods for a long time to come, regardless of the state of the housing recovery.
In many markets, this means that investors who buy foreclosures as income property as Jason Hartman advises may be doing more than securing their own economic future. With a commitment to the long term for maximum return on the investment, these investors contribute to the economic recovery of neighborhoods and the families who live there.
The Solomon Success Team