Is a Foreclosure Tsunami Hitting the Real Estate Market?

Since the financial crisis began in 2007, banks and lenders have almost doubled their real estate holdings, with over 872,000 homes currently in their possession, and still another million currently in the foreclosure process.  According to RealtyTrac, a real estate data provider, 1 in every 593 homes received a foreclosure filing just in April 2011.  That number is even greater in many states, including California, Oregon, Michigan, Florida, and even Nevada, where 1 in every 97 homes received a foreclosure filing just last month.

Economists are worried that these foreclosed properties are flooding the real estate market (NYSE:IYR), thus depressing home values, and this trend could last about 3 years until the banks (NYSE:XLF) are able to sell off their excess properties.  In the meantime, home values nationally could fall at least 5% this year, with the trend worsening as more and more homes currently in foreclosure go on the market.  States worse hit by the recession and the housing collapse could take even longer to recover.

Still, property owners aren’t the only ones negatively impacted by this trend. Banks (NYSE:XLF) and lenders stand to lose $40 billion as they are forced to sell homes at steep discounts over the next two years.  And in selling their properties at a reduced price, they are undercutting homeowners who may be trying to sell their properties in order to avoid foreclosure.  But surprisingly, the banks seem to be following the rules this time, and doing everything they can to avoid depressing the market still further.  According to Eric Will, who works at Freddie Mac overseeing the sales of distressed homes, “If we are out there undercutting prices, we are contributing to the downward spiral in market values…We want to make sure we are helping stabilize communities.”

Lenders are becoming more lenient with the foreclosure process, allowing renters currently living in housing being foreclosed upon to take their time in moving out.  And after being criticized for improper foreclosure practices last fall, banks (NYSE:XLF) are making a concerted effort to take their time and check the paperwork, which also slows down the foreclosure process, preventing the market from being flooded all at once with cut-rate properties, but also delaying recovery.  The process of foreclosure already takes 400 days, with many lenders delaying that process, and many states choosing to halt foreclosure operations altogether.  It looks like we’re just going to have to ride the wave on this one, because it’s only going to get worse before it gets better.

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