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The Foreclosure Moratorium and the Housing Market Impact on the Economy

The Foreclosure Moratorium and the Housing Market Impact on the Economy

With foreclosure freezes becoming the norm for the big three banks, GMAC/Ally, Bank of America and Chase, you can now also add Litton Loan Servicing and PNC Bank to the mix as additional banks halting their foreclosures to review their procedures. Because of these widespread foresclosure stoppages, many are questioning the impact this will have on the housing market and the broader economy. Opinions vary across a very broad spectrum. The White House claims that a complete halt to foreclosures will be catastrophic to the housing market. Other experts in the field also claim that such a halt will be catastrophic to the overall economy. But why is my question.

Applying simple economics and the law of supply and demand, one can clearly surmise that a halt shouldn't be as bad as everyone says. As the supply of housing increases, prices fall. Less foreclosures means less supply, which then tends to demonstrate that in the short term, home prices may stabilize, if only temporarily. Currently, houses for sale are sitting on the market for just over a year. In a normal market that wait would usually be about 6 months. To say that a halt to foreclosures will be catastrophic is simply a stretch. Uncertainty in the foreclosure process may lead investors away from buying up foreclosed homes, but with this moratorium and the industry making a concerted effort to "get it right", wouldn't the banks' review of their foreclosure process actually boost investor confidence? The media at play has a way to create hysteria when none exists. Title insurers are even creating insurance policies to protect against invalid foreclosures. Bottom line, in my opinion it will still take another 3 to 5 years to clear out the inventory of homes in foreclosure status and a return finally to a stable housing market.

In the long run, the only way the broader economy will begin to improve and the unemployment rate begin to decrease, is once the housing market begins to stabilize. Sure, a several week moratorium on foreclosures will delay the long term stabilization of the housing market, but seriously, will a several week halt in the process make a significant impact on the time it will take to make the housing market healthy again? I think not.

There are certain immutable laws that are constant, at least relatively. The supply of land is finite, population numbers will always continue to grow, and the housing market will eventually fix itself.

The bottom line is that there are so many industries tied directly and indirectly to the housing market that it is no wonder that the unemployment rate remains stubborn. Until the housing market stabilizes plumbers, roofers, electricians, brick layers, landscapers, cabinet makers, appliance producers, moving companies, architects, real estate agents, loan officers, and any other industry even remotely connected to the housing market will continue to suffer. Only the passage of time can heal the current crisis. A several week halt in foreclosures will not be a catastrophic event similar to the collapse of Lehman Brothers.