Taking a closer look at those "heavily discounted" foreclosure sales.

Are banks really giving their homes away?

You don't have to look far these days to find the idea that panicky financial institutions are recklessly wholesaling their swollen portfolios of bank-owned homes.  The idea appeals to the bargain hunter and fan of apocalypse in all of us, yet it's implausible if for no other reason than that it promotes the naive belief that huge financial institutions are 98-pound weaklings sitting on the beach waiting for consumers to kick sand in their faces.

Yet you'll find endorsement of the banks-as-reckless-sellers theory in the studies of academic real estate economists, who claim they've estimated how much neighborhood values decline for each "heavily-discounted" foreclosure sale.  Not only that, they say they've quantified the foreclosure discount, the effect foreclosure has on the value of the foreclosed home itself.

For example, a study frequently cited on the Internet, "The Subprime Economic Crisis:  The Economic Impact on Wealth, Property Values and Tax Revenues and How We Got Here", issued in October 2007 by the Joint Economic Committee of Congress, asserts that "research has shown that foreclosure causes a decrease in the value of the foreclosed home" estimated at 22 percent net of any additional decline in market value.  In other words, just going through a legal process that has no effect on the physical characteristics of the house—size, condition (unless vandalized) or location—supposedly reduces its value by about one fifth. 

And if that isn't enough, "Foreclosures also affect the values of neighboring houses.  We estimate the effect of a foreclosure on surrounding house prices as 0.9 percent of the value of all single family houses within 1/8th mile of a foreclosed house", and "it may be closer to 1.5 percent in low and moderate income communities".  Another recent report, issued by the Center for Responsible Lending, estimates that "subprime foreclosures expected to occur in late 2008 and 2009 will cause...surrounding homes to decrease in value by...an average of of $8,667 per unit affected".  Yet another report, "The Municipal Cost of Foreclosures:  A Chicago Case Study" done in 2005 by Harvard's Joint Center for Housing Studies, finds that "a foreclosure on [the neighborhood block studied] could impose direct costs on local government agencies totaling more than $34,000 and indirect effects on nearby property owners (in the form of reduced property values and home equity) of as much as an additional $220,000".

But you don't have to plod through academic studies to find the idea that foreclosed homes have a peculiarly insidious effect on market values.  You'll read it in the newspaper and hear it on TV, over and over and over again, because like "boots on the ground" and "shovel ready projects", the media has sunk its teeth into "heavily-discounted bank-owned properties" to prove it knows the lingo and shows no intention of letting go.

The Joint Economic Committee's report says, "A glut of foreclosed homes for sale depresses home market values for other owners".  Why?  The thinking goes like this.  First, bank-owned homes are always vacant, and vacant homes aren't maintained, which makes the surrounding neighborhood appear rundown.  Second, they attract crime.  A third explanation suggests that "foreclosures can be contagious; high concentrations can attract other foreclosures", which raises the possibility that the foreclosure crisis might be eradicated, like the fruit fly, by an airborne foreclosure-cide.

If I sound a trifle skeptical about all this, it's not because I take foreclosures lightly or think they raise neighborhood property values.  However, I think I see one small problem with linking bank-owned homes directly to plummeting home prices:  economists are confusing cause with effect. 

So let me advance an alternate theory:  it's not foreclosures, but weakness in demand for homes due to such factors as declining income and employment and lack of credit, that drives down the price of every home, bank-owned or not, in a neighborhood hit by foreclosures.  Foreclosures are a symptom, not the cause, of that weakness.  An epidemic of neighborhood foreclosures indicates a sharp decline in the purchasing power of both the homeowners who live there and of the buyers likely to buy there.  This decline decreases demand for homes in that neighborhood and, most likely, in every nearby neighborhood within the same price range.  All else being equal, a drop in demand will, by itself, lead to a drop in home values.

But all else is rarely equal in market cycles.  Dump "a glut of foreclosed homes" or, more accurately, a glut of any homes, foreclosed or otherwise, on a neighborhood and prices will nosedive, independent of, but especially in combination with, declining demand.  This is an important concept, because by eliminating the pernicious effect each foreclosed house supposedly has on neighborhood property values simply because it is a foreclosed house, we get a far more realistic picture of the effects of foreclosure.  It's also a far more scientific picture, because it doesn't attribute animate voodoo-like powers to inanimate foreclosed houses.  By moving past the pre-scientific "bad ju-ju" theory of real estate market forces favored by those modern-day shamans called "economists", and away from their fondness for explaining the marketplace by personalizing and blaming supposedly sinister larger-than-life players rather than basic market forces—a mythic view of the marketplace that Homer could relate to, with willful gods rampaging through the otherwise-peaceful lives of ordinary mortals—we move toward the more explicable, and therefore more supportable, demand-supply equation. 

In other words, folks, less demand + more supply = bad news in any marketplace.  Sharply reduced demand + way way  too much supply = really  bad news.  Note that I put foreclosures under the category of "bad news", on the right side of the equation, as the sum of that equation, and not, as the economists do, on the left side as one of its variables.  "Way way too much supply" is "way way too much supply", whether it comes from a subprime crisis sweeping low-income neighborhoods or from a tech bust sweeping middle- and high-income neighborhoods. 

Attributing neighborhood price declines to foreclosed houses, simply because they are foreclosed houses, is like attributing the measles to the bumps that go with it.  Calculating the effect of each foreclosure on plunging neighborhood home values is like calculating the property damage caused by each of thousands of pinhole leaks as the entire dam collapses.

This is a classic instance of the myopic academic real estate economist peering at the marketplace through the wrong end of his telescope.  But it reflects his fatal attraction for quantitative analysis, partly because it suits his temperament and training—how else can he try to interpret real estate? draw on his experience selling homes?—and partly because hard numerical proof is the hallmark of real science, and the academic real estate economist appears justifiably insecure as to whether what he does is real science.

Let's examine this banks-as-reckless-sellers idea more closely.  Are banks really desperate sellers?  How can we prove or disprove this?  And what effect do bank-owned homes have on the value of other homes?  Can banks single-handedly drive down neighborhood prices to below market?  Can anyone?  Why would they want to?  Why would they have to?

One way to measure the desperation—or "motivation"—of a seller is to look at the prices he, she, or that fictitious legal person called a corporation, is willing to accept.  Let's look at a local neighborhood where foreclosures and that related occurrence, short sales, accounted for the majority of sales in 2008:  single-family homes in East Palo Alto east of 101, and in Menlo Park's neighboring Belle Haven.

East-of-101 bank-owned homes (or "REOs", as they're called) appear to have sold at a substantial 11 percent discount to short sales (homes invariably nearing or in foreclosure but not yet bank-owned), which in turn sold at an almost-as-substantial 9 percent discount to conventional, non-REO and non-short sale homes.  We've just quantified the bank-owned discount east of 101:  a whopping 19 percent.

Woo-hoo!  At this point the academic real estate economist apparently clutches his breast, murmurs, "Be still, my heart!", submits his findings for publication and adds another notch to his belt.

Not so fast, Einstein.

Because it turns out that bank-owned homes east of 101 were significantly smaller, by 13 percent, than homes sold by conventional, non-REO/non-short sale sellers.  Not only that, they had an average of 1.4 bathrooms, compared to 1.7 for non-REO/non-short sale homes.  Both characteristics suggest that homes sold by conventional sellers east of 101 were typically newer and/or more upgraded than either bank-owned homes or short sales, which in turn suggests that the foreclosure crisis has hit not only the most affordable neighborhoods, but the most affordable homes in those neighborhoods.  And if foreclosures hit one segment of a neighborhood disproportionately, it complicates calculating the effect of foreclosures on the entire neighborhood.  In other words, have the best homes in these neighborhoods declined in value as much as the average homes, and have they in turn declined as much as fixers?  If not, can we make sweeping generalizations about these neighborhoods?

Let's eliminate some but not all of this difference in size and quality by calculating the sales price per square foot of each type of sale, bearing in mind that larger homes in the same neighborhood always sell for less per square foot.

Once we do, things change a bit.  REOs are still apparently discounted, by a more modest but still significant 6.25 percent (and it may be more) compared to conventional non-REO/non-short sales.  But short sales now look mighty expensive, selling at a hefty 18 percent premium to REOs.  Makes you wonder why banks are so reluctant to let short sellers sell their homes.  Probably because it's not that simple.

So let's let loose a more restrained woo-hoo! and maybe an eureka! or two, because this looks like good solid science and good solid scientists say things like eureka!  Once again, mighty science has proven the bank-owned discount:  about 6 percent.

Hold up, Madame Currie.

Because anyone who's seen bank-owned homes knows that nine times out of ten (and maybe more) they're hammered.  No, it isn't so much that the departing owner ripped out all the appliances, and maybe all the light and plumbing fixtures, and maybe all the copper pipes in the walls, on his way out the door.  You don't see too much of that here, although there has to be a glut of built-in stoves and dishwashers on the local used-appliance market these days.  And it's not so much that local bank-owned homes are afflicted by vandalism and squatters.  Yes, graffiti (inside the house, for that "welcome to the neighborhood" feeling) and broken windows are fairly common, and I've supposedly been alone in a home and not been all that sure I was, but these aren't the major problems.

No, the major problems these homes have might be summarized as the three Cs of bank-driven sales:  Crumminess, Callousness and Cluelessness.

Banks invariably spend zero money on their homes.  I'm not just saying that banks almost never do the relatively small things, like paint and carpet, that give sellers five or ten dollars back for each dollar invested.  I'm saying banks don't even clean their listings—and most of their listings badly need cleaning.  Defaulting homeowners apparently don't spend much time spiffing up their homes for the next owner.  Hey, I know how to put America back to work!  Make the banks paint and clean their properties!  Talk about putting money in the right hands right now.  It sure beats the banks buying $50,000,000 jets.  Although even that's okay if it pries a few bucks out of their cold dead hands.

Banks are so cheap and short-sighted that they're often reluctant to put the utilities in their name.  Instead, they ask the listing agents to do this, and it doesn't always happen.  Ever been in a house where the water's been off for months and agents and clients have been using the toilet?  Neither had I, until I started looking at bank-owned homes.  Turn on the water?  Naw, too expensive.  Maybe pour a bucket of water in the toilet tank so you can flush the toilet?  Naw, just buy a few air fresheners.

Another major problem with bank-owned homes is that, in this area, most are sixty to a hundred years old and haven't gotten much maintenance, often for years.  The few exceptions to this rule run toward cheap, amateurish "upgrades" that probably subtract as much value than they add.

Yet another problem is REO agents.  No, I haven't talked to all of them and, yes, I understand that they have a very tough job.  But it's been my experience that, with few exceptions, agents who specialize in bank-owned homes add zero value to the transaction.  In fact, I don't think that adding value, at least as it's defined in the normal home-selling process, is even in their job description.  What is?  Getting owners and tenants out of their homes, "trashing out" properties and the other chores that come with managing property in hostile circumstances.

In fact, I often find instances where these agents subtract value.  This is Henry Ford's assembly line adapted to real estate, and the product runs more like a Yugo than a Ford.  Their terse, generic and often inaccurate descriptions make me wonder if these agents have even seen the homes they're selling.  A few months ago clients of mine bought a home listed on the MLS as having one bathroom.  It had two, and the second bath was legal and showed in county records.  Think that second bath might add some value?  Only about 10 percent.  And the agent had been sitting on the listing for months.  Now other clients are in contract on a bank-owned home whose MLS description has several significant mistakes.  For instance, the listing says "two-car garage".  There is no garage son of a gun that two-car garage was here a minute ago!  The listing says "no air conditioning".  There is air conditioning, and it's central air conditioning only a few years old.  Etc.

I should say in defense of REO agents that the problem is partly a matter of perception and expectations.  The REO agent is neither fish nor fowl, not-quite-agent, not-quite-property manager, a mutated form of the real estate species that's emerged from the radioactive rubble of devastated neighborhoods.  And like any highly-specialized form of life, it'll either adapt or disappear when its environment changes. 

I should also note that one of the biggest challenges REO agents face is that neither they nor their clients, the banks, know the history of the homes they sell.  Many of the answers buyers and their agents normally expect from sellers don't exist or, to be more accurate, disappeared with the defaulting owners.  Because of this, banks have only minimal disclosure requirements—they need to disclose what they know, but banks are presumed to know very little.  In addition, REO agents must disclose any material information they observe.

But what little REO agents do know—about the home, about the offer you submitted two weeks ago—is often released on a "need to know" basis, and the presumption appears to be that you don't really need to know.  Granted, the REO agent may be as much in the dark as the buyer's agent, but an occasional message to this effect would be well received.  Think communication with buyers' agents might be important when you're selling assets worth hundreds of thousands of dollars?  Then I guess you're not REO agent material.  REO agents are frequently tough or impossible to track down, and their assistants are often overwhelmed.  The transaction coordinator I'm dealing with now is extremely sharp but admits she doesn't have time to read all my emails!  Get an agent or assistant on the phone and they'll probably let you know how valuable their time is.  It's like dealing with a rent-a-cop or maybe being back in kindergarten:  Move along now, move along!

Yes, partly it's the banks' fault.  I'm willing to believe that the surliness seeps down from the bank's overworked asset managers who, more than likely, complain about how surly their bosses are, who etc.  When I say "assembly line real estate" I'm not kidding.  I've dealt with REO agents who had well over a hundred listings, which is four or five times more listings than any agent, even one with an assistant or two, can handle.  Somehow the banks don't get this, or they don't care.  Just load up any willing agent with way way too many listings, just like they load up the asset managers, and hope the homes sell somehow.  If they don't, just give them to another REO agent who does business the same way.  It's the triumph of the bean counters and the Costco-ization of real estate.

The size of the foreclosure crisis overwhelms even the REO agents and assistants who might otherwise do a credible job.  But, frankly, the buck stops with them.  Sure, it's easy to question the professionalism of someone whose job you've never done, as any Internet discussion of real estate agents will confirm.  Sure, I have no doubt that a more accessible and accommodating attitude would have REO agents talking to low-ballers and other knuckleheads 24/7, but I suspect that the attitude also stems from natural inclination, reinforced by the cynicism that comes from working hip-deep in real estate's sausage factory.  And, sure, people have bills to pay, but it's my guess that REO agents had better make hay while the sun shines.  Because the way REOs are usually sold isn't making any friends in the real estate community, and it's a business model antithetical to the usual high-touch value-adding real estate practices.  (On the other hand, maybe today's REO agent is tomorrow's discounter.)

And the bank-driven selling process should be an object lesson for anyone who thinks the real estate industry should be "regularized" and "streamlined", taken out of the hands of hundreds of thousands of supposedly amateurish little guys and gals and given to a handful of huge financial institutions who, again supposedly, know how to kick butt and get the job done.  A lesson that will no doubt be forgotten or explained away by the banking industry's hired-gun economists in five years, when banks resume their temporarily-suspended campaign for permission to broker real estate.

The horror.

So that's the bank-owned scene as I see it:  Homes hard to like, let alone fall in love with.  Agents hard to reach, and hard to work with if you do.  The story behind the statistics.  Distressed real estate, up close and personal.     

Given all these obstructions to selling a bank-owned home, it's a wonder that the bank-owned discount east of 101 is only 6 percent.  In fact, it's a wonder bank-owned homes sell, period.  In fact, you have to wonder if maybe there's a bank-owned premium—that all that buzz about what bargains they are is actually inflating their prices.  Maybe REOs have a strong "brand" with the investors, bargain-hunters and no-fear pioneers buying them these days, and a strong brand boosts price. 

And bank-owned homes do sell.  How?  The answer offers a powerful lesson for any home seller these days:  just keep lowering the price until you find the floor.  And it's a brave seller who'll grit his teeth and do that.  I will give the banks credit for that.

Of course, the idea that banks keep lowering their asking prices implies that

What a concept!  Quick!  Someone alert Adam Smith!

To measure the motivation of banks, we can measure how much they reduce their asking price, compared to other types of sellers, before they achieve a sale.  Or at least you can, if you have the time, funding and manpower.  The MLS search program I use transfers only the current list price, not the original list price, into a spreadsheet, and I'm not going through hundreds of listings to manually calculate the difference.  This is one time I'll defer to the academics and their underpaid grad students.  Besides, all that work might end up only answering a different question:  which type of seller is most likely to overprice their property when they bring it on the market. 

What I can and will do is calculate how long bank-owned homes take to sell, and compare that measurement, called "days on market" (DOM), to other homes.  (This may or may not be complicated by the fact that banks often like to have their homes on the market a week or two before they accept offers.)

Once again, it looks like banks are dumping their homes.  Compare bank-owned DOM, 37, not only with other homes, but with average DOM for the entire east-of-101 market in 2008, 74, and it's obvious that banks don't mess around.  At this point the academic real estate economist moans be still, my heart! and publishes his second paper proving that banks give away homes like agents give away notepads.

But that's not the whole story.  To get it, let's divide the 88 single-family homes currently listed as active in the east-of-101 market into quartiles, based on their DOM.

The chart tells us that REOs, short sales and conventional home sellers are fairly evenly divided among homes in the first quartile, the quartile with the lowest average days on market, 7.  In other words, the three types of sellers are equally represented among homes that have just come on the market.  But note that REOs are over-represented in the second quartile, with its average DOM of 46, while conventional homes are under-represented.  REOs and conventional home sellers shift back into balance in quartile three (average DOM 110) with short sales now over-represented.  Quartile four, with its staggering average 264 DOM, shows the same story, but short sales now make up the vast majority of homes.

Which tells us a number of useful things.  First, few short sales sell, which should cool the jets of anyone who wants some of that "short sale action".  Most short sales linger on the market, even those that attract bona fide offers, inflating inventory numbers, sinking to the bottom of the active list and disappearing from the radar of buyers and agents, while the banks holding the loans take months to disapprove sales.  Short sales are irrelevancies in the marketplace, the oranges in the apples-to-oranges comparison.  REOs and conventional sales, on the other hand, are apples-to-apples.  And the chart shows that banks never do better, and often do just as well (or poorly) as conventional sellers, in nailing the price right out of the gate.  In fact, the two REOs in the fourth quartile are the granddaddies of the east-of-101 market, on the market a total of 875 days.

Isn't that interesting?

However, there's no doubt that REOs are more likely to sell than conventional homes, and far more likely to sell than short sales (most of which end up as REOs).  The absorption rate (sales/inventory) for east-of-101 REOs in 2008 was .58, for conventional sellers .35 and for short sales a paltry .12.  The difference, as mentioned, is that banks are usually disciplined home sellers, reducing the list price periodically until they find one that produces a buyer (or even several competing buyers).  Conventional sellers are often less than business-like in their attitude toward price reductions.  More important, with sales prices now rolled back to 1999 levels in this neighborhood, little or no equity keeps many conventional sellers from being able to sell without considerable financial pain, so their homes eventually leave the market unsold.  Short sellers also reduce their list price, but whatever they do is usually irrelevant, because it's the banks that are the decision-makers.

Finally, let's talk for a moment about whether banks, or anyone else involved in the selling process (like agents), can single-handedly drive prices down (or up) in a neighborhood.  I can't produce data that either proves or disproves this, but we've seen that, whatever else their faults, banks don't just back up and dump homes on a neighborhood with no concern for market values.  On the contrary, banks in the east-of-101 market, and in any other market I'm aware of where they're a significant presence, have been remarkably orderly in their disposal of homes.  And they can be very tough customers to deal with, which disproves yet another myth, that banks are push-overs, although it's hard to say whether this toughness comes from tenacity or from anal-retentive bureaucratic inertia.

And indeed, why would banks want to lay waste to neighborhood home values?  The depredations they do cause are, to a large extent, simply the result of having lots of mostly crummy inventory to dispose of, disposing of it poorly and being reasonably motivated to dispose of it.  In the face of stable or, more likely, sharply declining demand, more inventory inevitably means declining values.  No, banks don't help themselves with their "three Cs" selling technique, but values in any neighborhood are going to implode whenever inventory triples overnight just as most buyers disappear.  Yes, banks slash their prices relentlessly, but that's what it takes to find the new price floor and sell a home in a catastrophic market.  Isn't this unfair to conventional sellers, especially those selling homes directly comparable to the typical bank-owned home?  Yes, conventional sellers have no choice but to follow bank-owned prices downward, which wipes out still more equity, but that's what happens when demand for a neighborhood collapses.  And who says capitalism thinks in terms of "fair" and "unfair"?  And in fact, banks haven't just taken conventional sellers down with them.  Like real estate crabgrass, banks have all but crowded out conventional sellers from the very lowest price range.

All of this reinforces my contention that basic market forces, not evil spirits, move the real estate market.  It's not helpful to get hung up, as the academics do, on the name-tags these market movers wear.  It's not helpful to ascribe extraordinary powers, as the academics do, to a market mover just because its name-tag says, "Hello, my name is foreclosure".  

Now let's briefly examine the other components that supposedly contribute to the "bank-owned discount", and we'll do that by asking some of those tough questions science supposedly makes a career out of. 

First, is the way banks sell their homes—unwashed and unloved—all that different from the way homes at the ultra-affordable end of the price range are often sold?  Has any academic confirmed this difference and, if it exists, quantified it?  Has any academic even thought he might want to? 

Second, if foreclosed homes really do attract crime—and I'm willing to believe they do—then the real question is:  how much does an increase in crime affect property values in a neighborhood that may already be perceived by many home buyers, rightly or wrongly, as having a high crime rate?  I'm not sure anyone knows the answer to this or could calculate it.  And has any academic quantified the difference in the number of vacant homes between a foreclosure market and a normal market? 

Third, do banks really maintain their homes below neighborhood standards, consistently enough to make a difference in neighborhood property values?  I've never run across a bank-owned home that was a 10, but I've seen plenty that were 3s or 4s in a neighborhood with plenty of 3s and 4s.

In other words, have the academics proven their basic assumptions about the effects of foreclosures, or are their assumptions based on anecdotal evidence of the "everyone knows" variety, no proof required?  If the later, do we still call it science?  For example, the Harvard study cited near the beginning of this article is based on "a detailed examination of relevant sections of City of Chicago and Cook County budgets for 2003 and 2004, as well as a series of interviews with key informants in various departments in Chicago (italics mine)...Throughout the report, interviewees are identified by Department only, rather than by name, in keeping with our agreements prior to those interviews. For the most part, interviewees hold positions of significant responsibility..." 

Phrases such as "detailed examination" and "key informants" will probably assure most of the handful of readers who bother to check this report's methodology as to its validity, but in fact the quote above raises a number of questions: 

Not that these questions invalidate the Harvard study, but even a non-scientist reading its methodology only somewhat critically may have concerns about it which, unfortunately, raises the question every scientific study should go out of its way to avoid raising:  what assurances does it offer that it doesn't reflect the biases and agendas, conscious or unconscious, of either the group that funded the study, the scientists who did the study or the individuals who participated in the study?  For example, if you've ever watched well-meaning amateurs do the annual audit of a small non-profit you probably know that even simple financial statements are beyond the understanding of most of us.  And, certainly, academics could learn a thing or two about any subject by talking to people in the front lines—unless, of course, those people are real estate agents.  But I keep having this nagging thought:  my local newspaper's Question Man makes a living asking people questions, and no one calls what he does science.

Here's another question.  As for the undoubted costs that the market collapse that led to a foreclosure epidemic imposes on nearby homeowners, and also on local business owners and municipal governments, should those costs be offset to some extent by the undoubted benefits of several years of rising home prices and equity, due at least in part to the overly aggressive subprime lending that inflated property values in low-end neighborhoods?  This isn't to justify loose underwriting or predatory lending, just to point out that, like any exchange in the free-enterprise system, the lending that led to the foreclosure crisis offered apparent short-term benefits as well as not-always-apparent long-term costs. 

For example, a client who bought a home in Belle Haven in 2000 for $325,000 (with a prime loan) sold it in late 2006 for $609,000 (to a neighbor using subprime 100 percent financing) and invested the proceeds in his minority-owned business.  This created wealth not only for himself, but for his employees, the SoCal artists he records, the East LA landlord he rents from, the neighborhood restaurant he eats at, the national retailers he sells to, various taxing authorities and so on and so on.  How do you separate the wealth effect subprime created—not just for individual homeowners but for neighborhoods, communities, local and national businesses, the entire chain of government from local to federal and even international investors—from the crushing costs it now imposes? 

In other words, how do you quantify the net cost of the foreclosure crisis, in total or at various levels?

And even then we've only scratched the surface.  There's the homeowner's emotional cost of losing his or her home, of course, which is incalculable, but I also wonder about two other concerns that no one seems to have mentioned, at least in the media I read and hear.  First, what does the sudden evaporation of wealth, even if it was largely illusory, do to the collective psyche of the communities hardest hit by foreclosure?  I'm not talking about comfortably middle-class bubbleheads sneering at the idea of the American Dream, but the people who came here in pursuit of it and thought maybe they'd finally achieved it.  And second, how does the collapse of home values affect the perception of these communities about the legitimacy of real estate?  They were, at least in my experience, some of its most fervent (and vulnerable) believers, perhaps because in many countries land is still the source of wealth.  The fallout may well be long-term and far-reaching.

Now let's return to the original question:  does a bank-owned discount exist?  If it does, is it significant?  Might there even be, as I suggested a moment ago, a bank-owned premium?  Remember, I'm just asking.  I have my own opinions, but I'm well-aware that they're based on the face of foreclosure as it looks in Bay Area low-end suburbia and not, say, in the Central Valley or inner-city Detroit.

Which raises the question, are bank-owned homes the only homes to pursue these days?  Especially when foreclosures are the only part of the market in which buyers often compete?  Should buyers who can afford more house in a more expensive neighborhood focus on the typical low-end bank-owned home, simply because it's bank-owned, when motivated sellers exist in all price ranges?  Should such buyers concentrate only on neighborhoods where prices have declined most, or should the fact that these neighborhoods have been the hardest hit be a signal to them?      

Finally, all of this leads to the intersection of two of my favorite themes.  First is the naïveté of "it's simple, it's just numbers" or its near cousin, "data don't lie".  With all the nuances, potential dead ends and illegal left turns we've found in the numbers we've looked at, just in one short article, how much can quantitative analysis really tell us about real estate, especially when the nuances are known only to those in the marketplace, and not to those studying it from a safe distance through the lens of their inevitable biases and grad school preconceptions?  In the social sciences, number crunching is only as good as the insight the cruncher brings to the crunching.

But surely the number crunchers can at least tell us about broad market movements, right?  Then why do we have not one but three national home price indices, each giving us a different number not because the quality of its science necessarily differs but because each measures a different segment of the market and none measures the entire market?  The even better question concerns the misrepresentation or under-explaining of imperfect science:   is the Case-Shiller index the media's gold standard for the solid scientific reason that Shiller is a nationally-recognized brand name, and because his more volatile numbers make more dramatic headlines?

The other favorite theme is that the study of real estate, surely one of the most nuanced of markets, is in the hands of people equipped only with the tools of colorless quantitative analysis.  How ironic that a vibrant Technicolor marketplace is analyzed only in black and white.  "But that's the beauty of science", you might say.  "It strips away the extraneous stuff."  Fine, but it's the colors that paint a true picture of this marketplace.  Take those away and all you have is a black-and-white Twilight Zone or, considering how much heavy menace the economists find in the real estate marketplace, bad film noir.

So to summarize:  the impact of foreclosure, both on neighborhood values and on the value of the foreclosed home itself, is simple to quantify because it's just numbers and data don't lie and Mr. Science could explain those numbers if only he really were Mr. Science and not some modern-day Homer spinning yarns by the campfire and if only the social science called economics could turn real estate numbers into real explanations. 

Or maybe it's not simple at all.  All I know is that the complex interplay of foreclosures and the marketplace is an awesome, not to mention fearsome, demonstration of the market economy at work.

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