Thursday, November 22, 2007

The Coming Suburban Calamity

It is estimated that 2 two million homes will enter foreclosure next year. ‘So what’ you say. The United States is a country of 300 million people. Two million families is not a large percentage of the population. How much could it really affect the economy?

From my point of view it’s not so much the foreclosures as the psychological effect it has on property owners. Credit is drying up, builders are still completing projects and putting still more supply into a saturated market and two million more properties are set to hit the market in this near perfect storm.

All of this will have real effects, but it also is an undeniable sign that the housing party is over. That simple fact alone should scare the living crap out of any speculator who still holds property. It’s over and you are screwed! Let me count the ways…

Now here is another developing problem that is beginning to manifest; the effect a foreclosure property has on neighboring houses. Copper seeking looters, aluminum siding scavengers, drug dealers and gangs can all have a bad effect on an abandoned house and the surrounding neighborhood. If a home owner who is not in trouble finds his property value going negative due to the destruction of a neighboring property, he will have to decide if he can live with the increasing decline into chaos. If so, he may find very soon that the value of his property has gone to zero. This can be a problem for even those who own their houses outright. One look at a residential neighborhood that has degenerated into an abandoned no-mans’ land and most potential buyers will turn tail and run.

This is a problem that is already happening. Some formerly nice suburban areas in Ohio for instance are now behind a red line where real estate agents no longer tread, police presence is scarce and criminals have free reign. This situation is enough to persuade anyone to walk away from their investment, especially if they have little or no equity.

Crime scene: foreclosure

The Great Fall: How Suburbs De-gentrify to Ghettos

As foreclosures increase look for this problem to spread like an airborne virus. Each foreclosed house that sits abandoned for even a month attracts criminals of various sorts and soon looks like hell or worse. This has a direct effect on neighboring properties and can even affect a whole block of properties! Consider that there are typically 12 to 14 houses on any suburban street. One bad house can affect them all! I think it may be more accurate to take the 2 million potential foreclosures next year and multiply them by 14! In other words a possible 28 million abandoned or worthless properties.

As the effects of looting and crime drive owners away, the cancer will spread to even more properties until it reaches some sort of impedance. But tens of millions of properties could be abandoned or rendered unsellable before it all ends.



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