If A Lot Of Foreclosures Hit The Market, Will That Bring Down Home Values?

To answer this question we have to understand that there are two types of values that exist in the real estate market. First, the actual appraised value of the home and second, the emotional value. The appraised value is based upon recent sales to determine a mathematical value and the emotional value is based on the comparison of how the home looks and feels compared to the other homes on the market. Every buyer, no matter what they are buying, wants the most for their money.

So, will foreclosures bring down home values? It’s hard to definitively say yes or no. It’s likely, if a lot of homes start to foreclose that the underlying health of the real estate market is shaky which does likely cause home value to at minimum slow down their growth and potentially brings values down. It’s also likely if lots of owners stop making payments to the bank, a.k.a. goes into foreclosure, that banks will react by having increased interest rates. Increased interest rates make a home more expensive to purchase for a buyer from a monthly cost perspective and therefore likely that sellers have to react by lowering their prices.

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Foreclosures should not hurt the appraised value since appraisers should not use foreclosures or short sales as a factor for the value of a home. Appraisers look for homes that are similar to the subject property (the home being sold) and a foreclosure is not similar to a standard sale.

Foreclosures should also not hurt the emotional value of a home unless the interest rates have risen. It’s possible foreclosures mean more buyers start looking for a deal on a sale; however, most buyers are either looking for a move-in ready home or a fixer-upper. It’s unlikely the fixer-upper buyer would cross over into the move-in market and vice versa.