Something I don't understand about depressed real estate prices (foreclosures, 6%, mortgage)

[gailtoo]

I'm looking at real estate for a potential purchase in a depressed market. Could someone please explain how housing prices can drop so low if so many people have borrowed on little equity? Wouldn't it be illegal for them to sell a house for below the amount owed on the mortgage? It seems like this would put a floor on the selling price of a house.

[futurecruiser]

Originally Posted by gailtoo

Wouldn't it be illegal for them to sell a house for below the amount owed on the mortgage? It seems like this would put a floor on the selling price of a house.

Illegal? No, why would it be illegal? There's a few ways this would work

A) Sellers have to show up at the closing with money to make up the difference to pay the bank. This has happened before in times of bad economy when people sold houses at a loss.

B) They convince the bank to accept only the sales price under the mortgage (called a short sale). This isn't great for seller's credit rating. Doing A) doesn't affect credit rating. Banks write off the loss.

C) bank forecloses on house, and they sell it at a loss.

[Ivorytickler]

Originally Posted by gailtoo

I'm looking at real estate for a potential purchase in a depressed market. Could someone please explain how housing prices can drop so low if so many people have borrowed on little equity? Wouldn't it be illegal for them to sell a house for below the amount owed on the mortgage? It seems like this would put a floor on the selling price of a house.

Why would it be illegal? You can sell anything for any price you want. The only issue is what to do with the mortgage. Today, many mortgage comanies will take less than what is owed on the mortgage to avoid losing even more if they foreclose and have to have a fire sale.

How can they afford to do so? Easy, they've been collecting interest on these mortgages. I'm 5 years into my mortgage. My house value has dropped well below what I last mortgaged at but my bank has collected 6% interest on this loan for 5 years. I could easily sell for less than I owe, get them to accept that amount as payment in full and they'd still come out ahead on the deal.

Here the issue is competing with forclosed properties that are going dirt cheap. Unless you have something special to offer, you really can't sell unless it's a foreclosure. Once the foreclosures stop that will change but I wouldn't expect to make money any time soon in real estate. It will be a slow climb back up. If I were to invest now, it would be in stocks.

[le roi]

Originally Posted by gailtoo

I'm looking at real estate for a potential purchase in a depressed market. Could someone please explain how housing prices can drop so low if so many people have borrowed on little equity? Wouldn't it be illegal for them to sell a house for below the amount owed on the mortgage? It seems like this would put a floor on the selling price of a house.

A typical neighborhood in my area might be full of homeowners with $30,000 - $120,000 mortgages from the 1970's to 2000, but a handful of folks in the neighborhood paid over $200,000+ during the bubble, so all sellers want $200,000. $200,000 is not necessarily the cost basis for all these sellers, but I figure that speaks for their motivation to sell.

I suppose it is possible that all these people who bought for $30k-$120k have re-mortgaged themselves to a point where they cannot sell for less.. but the point is that not everyone is underwater, there appear to be plenty of sellers (again, just observations from my local area).. who are playing hardball with some pretty hefty appreciation #'s.

[mathjak107]

its no different then the stock market, everyones cost basis is different....