Housing Prices, Securitization and Foreclosure

Anyone who has been following the news about the Treasury and the various bank bailout problems probably has some idea that fairly large financial institutions are holding quite a bit of toxic legacy assets which are based on the home loans produced over the past few years.  The Treasury and the financial institutions are saying those assets can’t be properly priced due to a lack of liquidity in the financial system.  Thus we have the various forms of “bailout” providing taxpayer funds to improve liquidity in the financial sector.

Everything has a price and in a fairly balanced system buyers determine what the price will be.  If a seller asks too much, the buyer won’t complete a purchase but will look for a better opportunity.

Memphis Commercial Appeal has an interesting article regarding foreclosure purchases in the Memphis, TN area and the prices at which those purchase were made.  Their first example is a 5,000 square foot house that was purchased several years ago for $600,000.  Last fall, a buyer purchased the property, which was in foreclosure and in need of repair, for $350,000.  That’s a little over 50% of the previous sale price.

A second example is a home that had listed at $714,000 two years ago.  The home was foreclosed upon and the bank sold it for $361,000.  That’s also about 50% of what someone thought the value was several years ago.

Those stories, while not being conclusive evidence of a trend, will provide some basis for the belief markets will survive and thrive when values are at a level buyers find appropriate.  Real estate is local in nature so there will be areas that did not see much upswing, and those areas really won’t see much downswing either.  There are other places where the corrections aren’t anywhere near complete.

There is a level, though, where buyers will buy, it’s just a matter of finding the price.  Which brings me back to the “legacy assets” and the Treasury/Financial company pricing concepts.  Taxpayer funds aren’t going to make the securities based on home loans worth any more than the market buyers have already determined those securities are worth.  Taxpayer funds can delay the sale of those securities by providing capital to the banks and taxpayer funds might take enough risk out of a transaction to allow a buyer to increase their potential offer on those securities, but taxpayer funds aren’t going to increase “legacy asset” values significantly.

Unless, of course, taxpayer funds are used to cover the losses on the values of those legacy assets.