Foreclosed Homes Threaten to Further Weaken Housing Market

An article in the New York Times centered on the concern among some economists that the large number of foreclosed homes owned by banks and mortgage lenders will "deepen the housing slump and create a further drag on the economic recovery." The fear is that "the rise in lender-owned homes could create another vicious circle, in which the growing inventory of distressed property further depresses home values and leads to even more distressed sales."

Currently, big banks and mortgage lenders own over 872,000 homes around the country, are foreclosing on an additional million, and are expected to take control of another several million in the next few years. The impact is already being seen today, as "real estate prices have been declining across the country in recent months."

Lenders are having difficulty selling their properties quickly and at good prices, and in many areas they are repossessing more homes than they are selling. In Atlanta, lenders are repossessing eight homes for every one distressed home they sell; before the housing market's collapse, the ratio was typically one-to-one. According to the Times, "The reasons for the backlog [of unsold distressed properties] include inadequate staffs and delays imposed by the lenders because of investigations into foreclosure practices."

Concerns about the large foreclosed home inventories are real: economists predict that it would "take about three years for lenders to sell their backlog of foreclosed homes." Writes the Times: "As a result, home values nationally could fall 5 percent by the end of 2011, according to Moody’s, and rise only modestly over the following year. Regions that were hardest hit by the housing collapse and recession could take even longer to recover — dealing yet another blow to a still-struggling economy."

Says Mark Zandi, chief economist at Moody's Analytics, in the article: “Housing prices are falling, and they are going to fall some more.”

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