Upcoming Foreclosures

How do foreclosures in large numbers damage economy. I don't understand. Please explain?

I admit, i don't have much understanding of economics. But how does a house that is foreclosed, have an impact on the finances of other people and companies which have no relation whatsoever to the foreclosed property? if some people are doing well, how is their finances negatively affected by the foreclosures of other strangers?

Public Comments

1. Values in neighborhoods go down when homes set vacant, and communities go down hill. If neighborhoods are empty, stores are empty, maintenance work is not getting done, no utilities are used or paid for, just look at all the businesses support neighborhood, such as carpenters, plumbers, painters, fence people, pest control, lawn services, pool services, gas stations, local stores, shops. Crime can go up, which is an increase on the local services that costs tax dollars. It's all effected until people move back into the neighborhood.
2. Consider this: We all depend on one another for our finances. For example you depend on your employer for your paycheck and your employer depends on the consumer for his own income. And the consumer depends on someone else to get his income. And the government depends on the consumer and companies for its own budget. It is a very large cycle of dependence on one another for money since nobody has a money making machine (with the exception of feds or if someone successfully robs someone without being caught). When there is a disruption or fracture somewhere in that cycle of dependence, the flow of funds becomes somewhat tighter. When millions of such fractures occur simultaneously, the economy is bound to go down. For everyone's financial loss, someone else suffers. When you take a very large country and large economy, it can't work successfully if the flow of cycle is not smooth. Then some people rob each other, beat one another and crime goes up too as well as burglaries, etc etc
3. If you work hard an earn good money and then you get robbed, you can see how that damages you right? Now what if your neighbors are the ones that get robbed, that hurts them right? So there are many things going on at the same time here so I'm only get to mention two to keep it simple. You and your neighbors combined are part of the total economy so they are now poorer right? But then you say the robber is richer and he will spend on invest the money he stole right? But will he? Or will he buy different things? If everyone is getting robbed you are either going to work less or spend money on none productive thing like body guards, and finally you might Lise your house, and since others are losingvhere house too house prices drop including the value if your house
4. Let just do basic banking: If I put $10 in the bank for savings. The bank loans that $10 to Joe to buy a new hammer for home improvement. Well it turns out Joe wasn't a very good credit risk and defaults on the loan. The bank repos the hammer, but now it's only worth $6 because it used. How do I get my $10 back from the bank? This same scenario will play out with market fluctuations in home prices leaving a home owner upside down in their loan or people that got an over inflated appraisal of the home when they bought it. It can also be a deliberate act of the borrower, doing 100% ffinancing, then taking out a second mortgage then walking away from the loan. Now the bank is left holding the bag.
5. Well, one example- you paid $250,000 for your house 10 years ago. Two years ago the perceived worth of your home was about $400,000. But 1/3 of your neighbors' homes are now on the foreclosure list. Chances are they will sell for way less than $400,000- maybe $300,000 or less. Now you have to sell your home. BUT because so many homes in your neighborhood sold for much less, buyers are looking at the average sales price in your neighborhood to make an offer and you may end up selling your home for what you paid for it or maybe even less. Also, people lose their jobs, lose their homes or have to sell their homes, they can't buy news homes so there is a giant influx of homes for sale on the market making it a buyer's market, not a seller's because there is too much inventory.
6. Everything in economics is interrelated. For example, if you fail to pay your bills/mortgage the mortgage company loses it's investment. If enough people fail to pay their bills then companies have to lay people off or not hire. Hence unemployment. Economics is hardly rocket science. But it's a spiraling circle that kind of resembles your toilet. When you flush the water starts to circle, along with whatever deposit you have made, then it goes down the hole. That's what we're seeing with the economy right now. However, even when the economy is bad there are companies and businesses which are growing by leaps and bounds. What is one man's misery is another man's joy = Advanced Economics.
7. It's about supply and demand -- the ultimate basics of economics. While every home could theoretically be on the market for sale, only some are actually for sale at any given time. The price of any given home for sale depends upon how many people want to buy and how many want to sell. A home that is foreclosed is effectively on the market for sale. The more homes that are foreclosed the more homes that are involuntarily up for sale glutting the market with available homes. That means that, if you decide to sell your home tomorrow, you will get less for your home. Simultaneously, when a large number of people are defaulting on their loans that means that the people who own the mortgages are gettng less money each month and thus do not have the funds to loan for new home purchases. This tightening of the credit market reduces the number of potential buyers for homes, again lowering the price of homes on the market. It also reduces funds available for other investments -- such as new factories, etc. Lastly, the lowering of the market price for homes reduces the estimated price for homes not on the market. That means that you have less collateral if you want to use your home as collateral for other purchases. (And again the tightening of the credit market means fewer people willing to loan you money.)