They say there's never a cloud without a silver lining and it certainly would seem so where foreclosures are concerned. The fact that so many foreclosures are now hitting the market is a clear indication that a market correction mechanism is in operation in the world of property speculation and real estate and it is part of the market's self-correcting ability to stabilise every time it overheats.
Let's look at this process a little more closely so we understand it: Left unchecked here's what can happen to the real estate market. Properties begin to increase in price and value. The growing value of those who have already bought a property allows them to sell on so they can then invest in a bigger, more expensive one.
Those who are already in expensive properties take out second and third mortgages, releasing the equity in their property and enjoying some of the finer things in life. So far, so good. But, left unchecked the increase in house prices begins to force a lock out and a lock down. Those looking to get their foot on the first rung of the property ladder are beginning to get locked out as house prices on starter homes also experience an increase.
With no new buyers coming into the market those who are in the middle ground and need to sell on so they can move up begin to experience a lock down as sales begin to drop and buyers become sparse in a market that has suddenly got not just too expensive for them but also one lacking in movement.
This, in turn affects the entire real estate economy which relies on new home buyers for its buoyancy. You begin now to see why foreclosures can be considered a good thing. By ‘hitting' those who have bad credit foreclosures break the impasse of the lock down and the barrier of the lock out and release, in the real estate market, a fresh spate of properties which are affordable and can enable buyers to come in at a level they could not before.
This also mobilises the market as new buyers, generally, spend more than those upgrading or staying put, and it stimulates the economy which stimulates growth and jobs and begins to finance credit and homes and the whole cycle starts again.
Am I oversimplifying a little? Definitely yes and I am not for a moment making light of the personal tragedy for the aspiring home owner which is a foreclosure, but you can see how from a market mechanics point of view foreclosures are a necessary self-correcting mechanism which allows the real estate market to be truly self-sustaining.