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How the Foreclosure Flood Is Swamping Home Prices

Did you know home prices are falling? Oh. Still, this NYT story is worth a look if only to further chew on what's causing the problem -- the surfeit of homes coming to market, especially properties repossessed by banks:

Five years after the housing market started teetering, economists now worry 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.
Not sure what other "vicious circle" the Times is talking about. It's all one big circle, folks. Or more precisely, a thin, rapidly shrinking sphere. But it's certainly true that the huge inventory of bank-owned houses resulting from the housing bubble is likely to hurt real estate prices for years to come.

How long until home prices rebound?
For how long? Economist and housing expert Gary Shilling figures it will take at least four or five years for the market to digest the 2-2.5 million homes clogging up the sales pipeline. He also notes that lenders tend to sell foreclosed homes at fire-sale prices, driving more homeowners "under water" on their mortgages. That causes more foreclosures and pushes prices down even further.

Banks now hold some 900,000 "real-estate owned," or REO, properties. Yet less than one-third of those homes are currently for sale while roughly 1.2 million homes are in foreclosure. In other words, a huge backlog of houses will eventually have to be sold in order for prices to return to their historical norm.

After getting a lift last year from a federal program granting tax credits for home purchases, housing prices have receded roughly to their April 2009 low. Shilling expects prices to fall, at minimum, an additional 20 percent through 2016. That tracks with other expert predictions, including the Federal Reserve Bank of Dallas. Indeed, Yale University economist Robert Shiller doesn't rule out the possibility of home values sinking for the next three decades. Gulp. Such a mammoth slide isn't unprecedented, having occurred between 1912 and 1945.

Why lenders are stockpiling real estate
Homes are piling up on banks' books for a few reasons. First, buyers correctly expect prices to continue dropping, so they're holding out for even better deals than the huge discounts available in many parts of the country. Second, banks aren't staffed up to churn through hundreds of thousands of foreclosures. Third, following the "robo-signing" scandal banks have had to, you know, actually follow the law in selling foreclosed properties. Reports the NYT:

The biggest reason for the backlog is that it takes longer to sell foreclosed homes, currently an average of 176 days -- and that's after the 400 days it takes for lenders to foreclose. After drawing government scrutiny over improper foreclosures practices last fall, many big lenders have slowed their operations in order to check the paperwork, and in two dozen or so states they halted them for months.
Now, the sluice gates are opening, further weakening the housing sector. That had to happen, since what goes up must come down. But it means considerably more pain for homeowners, local communities and the economy at large.

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