The True Cost of Foreclosure Auctions

Money, Real estate

Since the housing crash a couple of years ago, foreclosure auction spam has become as ubiquitous in the email inboxes of America as Cialis and Nigerian bank transfers. Most of us delete them and move on, but foreclosure auctions have become big business.

Foreclosures rose from 750,000 in 2006 to 2.5 million in 2009, during the peak of the Great Recession. Where bargains are to be had, people will line up to take advantage of them, and foreclosure auctions have become a full-time job for a growing number of people.

But what does this sort of “capitalism at its rawest,” as the New York Times puts it, do, if anything, for the economy? Who benefits? How much money is lost in these transactions, and by who?

The Numbers

Although the housing market has recovered slightly in some areas, national real estate statistics show that, as of December 2011, 1 out of every 634 housing units was in foreclosure. That comes out to close to 1.4 million nationwide. States with the highest rates of foreclosure include California, Arizona, Nevada, Illinois, Michigan, Georgia, and Florida. The average price paid for a house through foreclosure auction is $182,516. More interesting are statistics on the percentage of savings at auction over the average regular sales price. In the top ten, Oklahoma leads the pack at 50% savings, with Massachusetts, Illinois, Maryland, Michigan, and Delaware coming in between 48% and 42% of retail value. Ohio houses are going at auction for 40% of their value, while Wisconsin, Georgia, and Virginia are in the high-30s.

Foreclosures and the Economy

Economic experts tell us that “forced sale of durable goods”—in other words, when your house gets sold out from under you because you’re behind on your mortgage—negatively affects the economy. It does this in two ways:

1. It drives down the price of the goods (i.e. all houses for sale, not just foreclosed ones), and

2. It lowers overall spending, causing the economy to suffer.

A correlation is clear between an increase in foreclosures and a sharp drop in housing prices, residential development, and durable consumption (which means buying stuff like a TV that lasts longer than, say, groceries.) How do they know those things weren’t caused by other factors, such as the banks failing and the stock market crash? Because they used what they nerdily refer to as an “empirical strategy” specifically designed to isolate the causal effect of foreclosures on the economy and housing prices. What they found was, although those things would have dropped anyway, rampant foreclosures caused them to drop farther and faster.

The Human Faces Behind Foreclosure

Although laws have recently been passed that encourage banks to work with distressed borrowers rather than taking their houses out from under them, foreclosure is still relatively commonplace. Auctions on foreclosed properties take place weekly in places like Phoenix, which attracts a regular crowd of buyers and sellers. Though numbers of houses auctioned have decreased in some areas due to recovery, it’s still a big opportunity, not only for individuals looking for an affordable property, but for foreign investors and hedge fund managers, who work through local representatives. The latter drive prices up, though, and make it more difficult for individuals to compete.

According to the Times, these auctions are all business. Homes are auctioned by address only, and homeowner names are never mentioned. It has been described as “emotionless.” Perhaps this is true for the sellers and bidders, but for the human beings whose homes were lost, it’s devastatingly personal.