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Foreclosures are the blight that has spread through the real estate market and driven prices to decade lows. The drop in property values that foreclosures have caused has pressured  homeowners who want to sell their own houses. Foreclosures have been a critical reason that many have underwater mortgages which prevents them from selling their homes at all. And foreclosures cause more foreclosures. Those underwater mortgages become too much of a burden to some Americans. These people lose their homes.

Real estate firm RealtyTrac reports that “sales of bank-owned homes and those in some stage of foreclosure accounted for 28 percent of all U.S. residential sales in the first quarter of 2011, up slightly from 27 percent of all sales in the fourth quarter of 2010.” RealtyTrac adds “The average sales price of foreclosure properties was nearly 27 percent below the average sales price of properties not in foreclosure.”

The inventory would take several years to sell off probably. “While foreclosure sales continue to account for an unusually high percentage of all residential home sales, sales volume is well off the peak we saw in the first quarter of 2009, when nearly 350,000 foreclosure properties sold to third parties,” said James J. Saccacio, chief executive officer of RealtyTrac. “While this is probably helping to keep home prices relatively stable, it is also delaying the housing recovery. At the first quarter foreclosure sales pace, it would take exactly three years to clear the current inventory of 1.9 million properties already on the banks’ books, or in foreclosure.”

Any economist will say that when some homes are sold at 27% below the normal market, all home prices will be pulled lower. That may be the key to the home market recovery. Foreclosure inventory will continue to rise as banks put more backlogged homes onto the market. The glut will probably push down the average of all homes by several percent. This may be a reason home prices are predicted to fall another 10% this year.

Buyers will not come back to the housing market until they believe that prices are too good to resist. That may mean homes that sold for $500,000 in 2005 will have to sell for $300,000 next year. Prices will not be driven down quickly without the reduction in inventory of foreclosed homes. There has to be a bottom to prices. The sooner it is found the better. The housing market is more than half dead. The only tonic is a belief by buyers that prices are so remarkably low that new buyers will make money on a house and not loss it.

If the housing market is to continue to drop, the drop needs to be swift. Mortgage rates are near all-time lows. Inflation and concerns about the value of Treasuries due to the US national deficit could change that. Home prices that are viewed as affordable need to be married with low mortgage rates for the market to catch fire.

Without the inventory of foreclosed homes, the housing market could flounder for years. With it, a bottom may only be a few quarters away.

Douglas A. McIntyer