During the 20th century much of the real estate market was a case of boom and bust cycles which repeated themselves without anybody ever learning anything. This certainly was the case of the boom-and-bust cycle of the seventies and then the repeat of that in the eighties.

The nineties, however, appeared to introduce a different story. Real Estate prices started to rise gradually and steadily, credit became increasingly cheaper and easier to obtain, the price of many items fell as globalization introduced the notion of negative equity and many home owners opted for the good life and took out second and third mortgages releasing equity stored up in their homes and deciding to live the good times.

The 21st century, it seemed, would be a time for enjoying life to the full without having to worry about huge fluctuations in the markets. But money does not just come from nowhere. Borrowed money needs to be paid back which seems to argue that, at some point, the party has to stop and someone will have to pay the bill.

The cynics amongst us will say that this is exactly what is happening with the current tightening up in credit and an increase in the number of properties going to foreclosure and being sold off with their owners’ credit rating seriously damaged for a long time.

But that is not the real story nor is it true at any rate. Yes, foreclosures are on the increase and, in all likelihood, will continue to rise for some time. What is really happening here is that the overheated housing market is undergoing a correction with house prices not falling (the bust part of the old cycle mechanics), but stabilizing in a slower growth which more closely reflects their true value and affordability by those who are now looking to purchase a home.

Unlikely as this may seem this is actually good news. Foreclosures release homes which are trapped in the housing market at an artificially high price which had been fuelled by demand and make them affordable again for first time buyers. In addition, because there is a greater supply of more affordable homes than before the low prices attracted by foreclosures have a dampening effect on the rest of the housing market which then stops from growing faster than the ability of the underlying credit to support it.

Don’t get me wrong. Foreclosures are never good news for anyone but, as part of the real estate market’s and mortgage lenders’ activities; it is yet one more market correction mechanism that is in place. We should neither under nor overestimate its impact and we should see the figures for what they are: an inevitable consequence of a market that was over-stretched, now bringing itself back to level ground.

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