Boom and bust

Foreclosed homes typically sell at steep discounts, having a significant negative impact on neighboring properties.

The above is a quote from the letter FDIC chairperson Sheila Bair wrote to CNBC real estate reporter Diana Olick about a possible loan modification program to save more than 1 million at-risk subprime borrowers.

The implication of Bair's statement was foreclosures hurt neighborhoods. We're not going to debate that point - in fact, we will examine what falling property values can do in an upcoming post. But let's look a little deeper at how we got here, with scores of projected foreclosures looming over many unsuspecting (?) neighborhoods. Follow me on this one...

The recent housing boom (born from factors like easy access to credit, rampant speculation and excessive buyer optimism) created a housing market that exceeded all rational economic bounds. As houses shot up in value - while at the same time disconnected from fundamentals - properties commanded higher and higher prices, until things finally gave out; we are now seeing prices tumble. When prices fall and equity evaporates, that part of the free money spigot (massive, multiple lines of home equity credit) is turned off.

When there is no easy access to more cash, no way to quickly get out by selling for enough of a profit to cover the debt (not enough willing buyers with access to the proper financing to go around), and no realistic way many owners can fulfill the terms of their loans, foreclosures start happening. Like mad. As in more quickly than the '90s.

Therefore, what once was known as the housing boom has now begun to backfire on the very neighborhoods it tantalized with its gilded dreams of real estate glory. Foreclosures are just the last step on the road to financial ruin. The inevitable fall was crafted back when prices were ballooning further and further into the stratosphere.

Foreclosures have begun to hurt neighborhoods, cities and even regions - and threaten to do much worse in the coming months and years if there is no viable path to abatement. But, if you dig to the roots of the problem, the now-gone housing boom itself is the darker, underlying culprit.

It is what laid the groundwork for the magnitude of the current and impending housing downturn, of which foreclosures play a significant part.

Had the bubble not occurred, to the degree it did, then it is very possible we would not be in the precarious economic position we are in now. Foreclosure levels, then, would also be much lower. Fewer families and neighborhoods would be stung.

So, David Lereah, Are You Too Regretting the Real Estate Boom?