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Data from research firms from S&P Case-Shiller to Corelogic have indicated recently that the housing crisis has reached a bottom and that a sharp recovery may occur next year. That prospect appears much less likely when foreclosures and their effects are taken into account. Foreclosures almost always bring down property values in areas where they are numerous. A home that sells for 75% of the value of those around it drags down prices for that entire market.

New information from RealtyTrac, the most well-regarded of the research firms that track foreclosures, reported a sharp increase in the third quarter, when homes in foreclosure rose 21% from the previous quarter. “A total of 193,059 U.S. properties (were) in some stage of foreclosure or bank-owned (REO),” the firm reported.

Not only are the sale prices of foreclosed homes less than those of other homes, banks have taken sharp losses as they dispose of inventory:

Non-foreclosure short sales prices in the third quarter fell short of the total amount of loans outstanding by an average of $82,312 per short sale. For all short sales, including non-foreclosure and in-foreclosure properties, the sales price was short of combined loan amounts by average of $94,896 per short sale.

Banks have adopted a scorched earth approach as they sell distress real estate and drive down values across much of the home market. Ironically, these banks hold loans on many of the houses in these neighborhoods occupied by people who still pay mortgages. The more banks sell homes at discounts, the more mortgages in those same neighborhoods are pushed underwater. And underwater loans are more likely to default than those based on some positive equity.

The dilemma banks face continues to be concentrated in several states. Foreclosures sold at discounts to market prices almost certainly will harm values in these regions most of all. Prices in some states are still falling, and with them foreclosures remain high. If banks do not hold inventory in these states off the market, the trouble with underwater mortgages and defaults will worsen.

RealtyTrac reports:

Georgia, California, Arizona post highest percentage of foreclosure sales Foreclosure sales accounted for 38 percent of all residential sales in Georgia, the highest percentage of any state during the third quarter but down from 41 percent of all sales in the second quarter. Pre-foreclosure sales in Georgia increased 40 percent on a year-over-year basis and REO sales increased 4 percent. Non-foreclosure short sales in Georgia increased 32 percent on a year-over-year basis and accounted for an estimated 18 percent of all residential sales in the third quarter.

California foreclosure-related sales decreased 12 percent on a year-over-year basis, but those sales still accounted for 36 percent of all residential sales, the second highest percentage of any state. California pre-foreclosure sales increased 17 percent on a year-over-year basis while REO sales were down 37 percent. Non-foreclosure short sales in California increased 20 percent on a year-over-year basis and accounted for an estimated 14 percent of all residential sales in the third quarter.

Foreclosure-related sales accounted for 34 percent of all residential sales in Arizona, the third highest percentage of any state despite a 28 percent year-over-year decrease. Pre-foreclosure sales were still up 6 percent on a year-over-year basis in Arizona, but REO sales decreased 49 percent from a year ago. Non-foreclosure short sales in Arizona increased 12 percent on a year-over-year basis and accounted for an estimated 16 percent of all residential sales during the third quarter.

No single part of the data from these states gives reason for hope of a recovery.

The recovery of the housing market is a myth, at least when the pockets of real housing problems are factored into account.

Douglas A. McIntyre