The number of foreclosures coming into the U.S. market have led to a large number of defaulting borrowers and a credit crunch which has made it harder for new borrowers to borrow more money. Read at face value these are all signs of an economy about to go into a tailspin, but is it really like that?

In real estate nothing ever occurs in a vacuum and this case is absolutely no exception. There is always a knock-on effect on things which means that no bad situation can lead to a worse one without also sowing the seeds for its own improvement. While this may sound, at first, paradoxical, it is actually very logical.

Let’s examine the current state of the foreclosure market. Home owners are defaulting and, as a result, foreclosures are coming to the market at auctions and then, if they fail to sell, become the property of the bank which will try to dispose of them in a variety of different ways in order to reclaim at least some of its money.

The banks and the lending institutions are, at the same time, tightening up on lending, which has led, according to the latest figures released by Experian, the credit check company, to up to half of all credit card applications being refused and more than a 20% increase in rejections in mortgage applications.

Now you will ask how is it possible to view the increase in foreclosures and the fiscal crunch as a positive thing and the answer has to lie in our examination of the effects. While, for instance credit rejections have risen, there is still a sizeable majority getting through and these represent low-risk, rock-solid borrowers who will go ahead and purchase a home they can afford to repay.

By the same token, the increase in foreclosures is fuelling movement and interest in the driving engine of the real estate market: the new home buyers and real estate investors looking for value homes which will appreciate in price.

So, while the credit crunch is forcing a tightening of the market it is also creating the conditions which will help it grow again. More and more of the borrowers approved have the credit necessary to support the backbone of the market, and with an influx of homes being sold off at below market rates there should, in future, be enough low priced homes appreciating in value to lead to a further jump in equity and create the buzz which is needed to sustain interest and momentum in a market.

And all this because right now we are facing both a credit crunch and an increase in foreclosures. The real estate market is ran along the lines of a very organic model and by the looks of it, it is pretty robust.

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The moment Barclays, a UK bank with a banking tradition stretching back to 1896, has to publish an extraordinary public statement adding greater transparency to its exposure in the U.S. sub-prime mortgage market you realize that the global economy is now here to stay and that the U.S. economy is still at the centre of the world.

The reason the activities of a UK bank are important for the U.S. sub-prime mortgage market and foreclosures is because it is the clearest indication to date of the interconnectedness of markets and the value of U.S. homes to the economy not just of our country but, as it turns out, the rest of the world.

In terms of foreclosures this means that the world’s interest in the U.S. property market is creating opportunities which at the moment are not reflected by the current state of the market and this is exactly the point where the smart money gets in and makes a killing.

Foreclosures, the seeming real estate crisis aside, represent a sizeable opportunity for those on the look out for a real estate investment bargain as they are always off-loaded below market value, can be bargained down further by someone with the right persuasive skill and often ready-made equity already built-in.

I understand this is a generalization and just as there is no really ‘average’ foreclosure any more than there is an ‘average’ real estate investor. However generalizations are useful as they allow us to focus away from the details long enough to see the bigger picture and the bigger picture looks a lot better than most people would expect.

Let’s take a look at the reasons why. The banking crisis in the sub-prime mortgage lending market was sparked off by a market imbalance and rising interest rates which, in turn, led to an examination of indiscriminate lending practices and a questioning of the degree of exposure of banks in these sub-prime mortgage loans which then closed the loop as lenders started to crack down on late payments by borrowers and those who were beginning to default and this, then, became a self-fulfilling prophesy.

In truth there is continued interest in the U.S. housing market and the foreclosures coming to the market are releasing housing stock which, if bought now, at competitive prices has the potential to hugely appreciate in price creating a new level of wealth for those coming into the market either as home owners or real estate investors.

This means that even as the U.S. real estate market is dipping now, the foreclosures we are seeing are providing the springboard that will make it rise again generating, in the process, more wealth for those who were perceptive enough to see it and take advantage of the opportunities offered.

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The macro-economics of the U.S. and, quite possibly, the world are reflected in the reviving micro-economies of the States of Florida and Texas. The diversity of properties and property-types and the demand for properties in both these States makes them prime examples of what will happen with the rest of the U.S.

Both Florida and Texas have defied the usual boom-and-bust cycle of real estate. Florida experienced a slump as early as 2005 because of huge appreciation of house prices which led to a correction and Texas has got off slightly with perhaps the softest of soft landings in its real estate prices and demand never, appreciably, dipping very much at all.

The reason both these States have got off so lightly despite having lenders exposed to the sub-prime mortgage market which has led to foreclosures is because they also manage to meet the criteria for recovery:

1. A correction that does not crash the market – real estate prices in Florida dropped and in Texas there has been a correction but in neither State was the drop so sudden and so dramatic as to crash the real estate economy and stop demand.

2. Steady development – Florida is currently awaiting the completion of a new international airport in Panama City which will greatly increase the number of people coming into the State and the demand on its housing. Texas is undergoing steady development of its lakefront and surf properties as well as its recreational properties which means that investors are constantly looking at Texas Real Estate as a means of making good buys with their money.

3. Fresh supply of properties- finally both Florida and Texas have seen no appreciable decrease in new properties hitting the market. Whether it’s in the form of brand new housing or property developments or value properties coming in as the result of foreclosures both States show a healthy base of new properties and this is vital as it sis these which drive the overall engine of the real estate economy by attracting an influx of new buyers.

Summarizing, the micro-economies of Florida and Texas indicate that provided the three conditions I have just covered are adequately met then there is no reason to fear that the housing market slump is going to last any time at all. Recovery is probably just around the corner and as the pace of development continues house prices will continue to appreciate and this will offer both growth and the opportunity for growth which drive markets in an upward trajectory, attract first time buyers and investors and do much to inject the needed lifeblood of the local economy.

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