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When the U.S. economy tanked, and the housing market was flooded with foreclosures beginning in 2008, what impact did this have on prices?
That’s the question Steve Swidler, J. Stanley Mackin Professor in Finance at the Raymond J. Harbert College of Business, answered before faculty and PhD students Sept. 23 during a research seminar at Stockholm University in Sweden.
Swidler’s presentation stems from research “The Impact of Foreclosures on Housing Prices in a Downward Spiraling Market,” that he, Harris Hollans, Associate Professor in Finance at Harbert College, and Craig Depken from the Belk College of Business at UNC-Charlotte, co-authored. The work is currently under review for publication by the Journal of Real Estate Research.
“In general, as people had to sell houses under less than optimal circumstances -- the sales prices were lower than they otherwise would have received in normal markets,” he said. “What this paper addresses is those homes that were sold under distressed circumstances … what effect did that actually have on prices themselves? As the financial crisis hit in 2008, housing prices were already declining in the United States for about a year, but distressed sales accelerated their price decline. A lot of people found themselves with loan balances larger than the value of their homes and they had to make decisions. Did they want to continue to pay on their homes, which were worth less than their notes, or did they want to default on their loans?”
Selling under these circumstances might be necessary, but doesn’t provide home-owners much return on their investments, Swidler said.
“Caught in this middle ground, a lot of people tried to sell their homes — or in some cases were actually forced to sell their homes — and had to take a price that we would call a distressed price,” he added.
In other words — a price far less than desired.
“Usually in economics and finance, when we talk about a normal sale, whether it’s houses, stocks or whatever, a normal sale would be one considered where you have a willing buyer and a willing seller,” Swidler said. “Both parties are entering into an agreement that this is what they would like to do. During this period of the financial crisis we saw people who were selling their homes who weren’t really willing sellers. That created these transactions where people where selling their homes for perhaps below what they might have been worth had they been able to properly market their home.”
The foreclosures took its toll on the rest of the market as well.
“Even people who were selling their homes and it was not a forced sale – i.e., were able to take measures that might get them an optimal price -- they were affected because they were competing against the distressed sales homes.
“Eventually, all housing prices reflected the effect of distressed sales and foreclosures. Even if it wasn’t a distressed sale, per se, ultimately the increased supply on the market affected the price of all homes.”
Swidler said the team’s study centered around the Las Vegas, Nevada, market – one that saw home prices plummet by more than 60 percent from 2006 (almost $300,000 per home) to 2011 (roughly $140,000 per home).
“It appeared to be a buyer’s market except one of the reasons why prices plummeted was because there weren’t that many people willing to buy,” he said. “If I see housing prices going down, down, down, do I want to buy right now?
“Housing prices fell to a point to where they were below 2000 level prices. They had been overbuilding in the area. Las Vegas had been a fast-growing area in the previous decade, but the housing stock actually increased faster than the population.”
But the housing market crash wasn’t a bad deal for everyone, Swidler noted.
“One thing we lose sight of is the silver lining in an otherwise dark cloud,” he added. “While many people were hurt and many people lost tens of thousands of dollars in their housing assets – other people eventually benefitted from that. Some people were first-time home-buyers or got the house that they had always dreamed of. Unfortunately, one person’s pain was one person’s gain.”