With many different proposals for bailout funds to be used in different ways, a common thread is the preservation of home values by preventing a glut of foreclosed homes in some areas. There are some predictions that roughly one third of all homes listed for sale at the end of the year will be foreclosed homes. What does that do to property market value?

It depends. Real estate, by it’s nature, is local. Prices in North Dakota have very different fundamentals than prices in Southern California. Employment, lifestyle, type of property, climate, all these factors will influence both property prices and appreciation/depreciation rates. There are many areas in the middle part of the United States that did not see the rapid appreciation experienced by California, Florida, Nevada and Arizona and it’s highly unlikely those areas will see significant price depreciation. There is certainly the possibility of price declines, but those declines will be related to changes in the regional economic picture rather than a speculative bubble bursting.

So what happens in those states where significant appreciation occurred? That also depends. Areas in those states with stable employment and established homeowners will undoubtedly see declines in property values, but the foreclosure rates in those areas aren’t going to be high enough to create a self-reinforcing trend. Markets can, and do, absorb foreclosed homes without causing significant market changes as long as the foreclosure numbers aren’t overwhelming.

In those high appreciation states there are specific areas that experienced phenomenal appreciation due to speculation and lax underwriting standards. These areas had a very high number of first time buyers and credit impaired buyers who were purchasing with loan programs underwritten with the assumption that property values would not ever decline. You can consider these areas foreclosure ground zero.

Any bailout program attempting to prop up property values at foreclosure ground zero by providing homeowner loss mitigation assistance has virtually no chance of succeeding unless the program is going to subsidize virtually every homeowner in these areas. That’ll take just a little bit more than 700 billion in my opinion. Here’s a video that illustrates some of the issues.

One thing I have not seen proposed yet, which seems to make a lot more sense than trying to salvage the vast number of less than optimal loans, is significant assistance for first time homebuyers in those troubled areas.  Prices at this time are significantly closer to the bottom than they are to the top, a strong incentive to place new owners into these areas will tend to both stabilize prices and clear inventory from the lender’s books.