foreclosure | Geographical Perspectives

Banks are Destroying America’s Neighborhoods Part 2 – Response to Comments

Wow – I never expected that my post about Banks Killing America’s Neighborhoods would attract so many readers. I want to thank Daniel Roth for highlighting my thoughts on LinkedIn. I also really appreciate all the comments that were left here on my blog and on the LinkedIn Residential Real Estate discussion board. I’ll try to respond to a few comments here but I may need a few separate replies to cover all the topics.

1. Several people pointed out that if the banks sold everything at once it would, in fact, drive down prices further. Of course it would (although I don’t think it would cut prices in half as someone suggested). I didn’t mean to argue otherwise although I think there’s so much inventory being held up that it would take a long time to push it through whether it was all listed at once or not. But, when banks hold on to these properties it is definitely causing the problems I mentioned with deteriorating structures and crime. I’ve seen it first-hand. So the banks are going to lose money either way – whether they hold on or sell quickly. Frankly, I think they’d be far better off selling before the houses in their inventory are damaged due to neglect or vandalism. When a house sits empty for over a year people notice and some will take advantage, often to the detriment of the property.

Banks are Destroying America’s Neighborhoods

I read an excellent piece this morning in the New York Times written by Greg Smith about why he was leaving Goldman Sachs. In short, he says it’s become too sleazy as short-term profit motives are now trumping all other considerations.

In the past 2.5 years I’ve been investing in real estate in my home town Pueblo, Colorado. What I’ve found is that large banks are dragging out the foreclosure process so that homes are left vacant for 18 months or more. This is bad for everyone.

It’s bad for the banks because while the homes sit vacant they deteriorate and lose value.
It’s bad for the neighborhood because it drives down prices and vacant homes invite criminal activity.
It’s bad for local government because the value decline results in lower revenue while additional criminal activity requires higher expenditures.
It’s bad for investors and prospective buyers because they have to spend more money on repairs.
It’s bad for renters because the reduced housing inventory decreases supply and drives up rental costs.

Housing Price Index changes by MSA

I get a little annoyed when I see articles ranking which states have the worst foreclosure problem or the biggest drop in housing prices over time. Why would anyone want to look at this at the state level? Maybe state governors and political talking heads? Not really my kind of audience. The economic drivers that determine the health of a housing market are far more localized and don’t really care about state boundaries. I think you have to at least look at metropolitan areas to learn something about housing prices.

For example, let’s look at Illinois.