Analysis: New wave of foreclosures to push prices lower

WASHINGTON Thu Oct 13, 2011 7:36pm EDT

A realtor and bank-owned sign is displayed near a house for sale in Phoenix, Arizona, January 4, 2011. REUTERS/Joshua Lott

A realtor and bank-owned sign is displayed near a house for sale in Phoenix, Arizona, January 4, 2011.

Credit: Reuters/Joshua Lott

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WASHINGTON (Reuters) - The paralyzed U.S. housing market is once again up against an obstacle it has seen before -- mounting foreclosures.

And a fresh drop in home prices is likely to result.

Banks have stepped up the pace of home seizures after a year-long slowdown brought on by the "robo-signing" scandal in which banks were accused of seizing properties without a proper review of loan documents.

The number of foreclosure filings -- which include default notices, scheduled auctions and bank repossessions -- edged up 0.3 percent in the third quarter, reversing a trend of three straight quarterly declines, according to real estate data firm RealtyTrac.

The increase was driven by a 14 percent jump in default notices, the first gain in five quarters and a sign lenders were preparing to step up repossessions of homes.

Foreclosure filings began dropping off in September of last year as major lenders halted property seizures to ensure their paperwork was in order.

Housing prices have begun to stabilize and shift higher in recent months. The S&P Case-Shiller index of home values in 20 U.S. cities rose 0.9 percent in July, its fourth straight monthly increase, as 17 of the cities posted gains. Despite the improvement, it remained 4.1 percent below its year-ago level.

If a fresh flood of foreclosed properties hits the market, housing prices will likely take another leg down. Banks price foreclosed homes with an eye toward a quick sale.

"Increased foreclosure filings will continue to erode house prices," said Ed Delgado, a former Wells Fargo senior vice president and CEO of the Five Star Institute, a mortgage-education provider.

"The question is, at what point do you reach the bottom of the market?" he asked.

Delgado says he does not see any signs of recovery in the foreseeable future, and says things will get worse before they get better. He also worries the bottom might not be hit until the third quarter of next year.

PUSHED TO 2012

RealtyTrac warns that as many as 1 million foreclosure actions that would have taken place this year will be pushed into 2012.

The firm also says they do no expect to see home price appreciation until the housing market works through the backlog of distressed assets, and the overall malaise in the sector could continue for the next three to four years.

"Banks are beginning to process foreclosures again after taking the time to get their paperwork in order. They've done the diligence they needed to do," said RealtyTrac chief executive James Saccacio. "Now there's this wave coming back in and more defaults are being processed."

Foreclosure activity weighs on overall home prices by adding a bulk of supply on the market at cut-rate prices, leading other would-be sellers to lower theirs in order to compete.

A high level of foreclosure can lead potential buyers to worry prices have further to fall, which could leave them cautious about buying even though mortgage rates are at historical lows.

Home prices are already about 31 percent below peaks hit during the height of the housing boom in 2006, according to the 20-city S&P/Case-Shiller index.

A survey by MacroMarkets LLC showed economists expect home prices to rise just 1.1 percent a year through 2015. That is less than a third of the annual pace clocked in the 13 years that preceded the housing bubble, the survey found.

Not everyone, however, thinks a fresh supply of foreclosed homes will push prices lower.

"The problem has been declining prices but that may be reversing," said Joseph LaVorgna, chief economist at Deutsche Bank Securities in New York.

"I would not bet against housing just yet. There may be some light at the end of the tunnel."

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