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Foreclosures will probably rise in 2012 — and that could be a good sign

There are too many vacant houses and not enough people who want to buy them. And that’s a reality that’s likely to get worse before it gets better: The number of foreclosures is expected to rise significantly in 2012, adding to a housing overhang that has depressed prices and held back the recovery.

But some of these new defaults may be necessary medicine for the housing market to recover in the long term: They represent homes that have been backlogged in the courts and elsewhere that can’t be sold until they finish going through legal foreclosure proceedings.

Over the past year, delays in the foreclosure process have prevented a large number of distressed homes from going on to the market. It’s partly because of the recent crackdown on robo-signing and other abusive, illegal practices that forced people out of their homes. But it’s also because states where foreclosures go through the courts — including Florida, New York and Maryland — have become backlogged, slowing down the process even further.

Partly as a result, about one million homes have begun but not finished foreclosure proceedings — a big chunk of the so-called “shadow inventory” that isn’t included in the official foreclosure count, according to analysis from Capital Economics, a Britain-based research firm.

That’s also why there’s been a recent drop in the number of existing properties for sale, which fell 20 percent between 2011 and 2012. It’s not because there’s been a huge increase in demand — the sign of a real housing recovery — but a “temporary drop” due to the foreclosure delays, as Bank of America Merrill Lynch explains in a research note this week.

In 2012, however, the rate of foreclosures is expected to pick up again. Having reached a $25 million settlement with state officials over faulty mortgage practices, banks are expected to pick up the speed of foreclosures once again. “This means that distressed inventory is likely to increase again, crowding out opportunities for new construction,” according to Bank of America Merrill Lynch analysts. Some states are also taking action to clear the backlog as well: Florida legislators, for instance, are moving ahead with a bill that would speed up the process of dealing with backlogged 368,000 foreclosures, which currently take an average of two years to resolve.

The coming flood of new foreclosed homes will push up the supply of vacant houses once more, which could further depress home prices as there still aren’t enough home buyers. But it’s step that’s ultimately necessary for the housing market to come back in the longer run. “Basically we have to go through this. . .we have to resolve that problem before anyone believes the housing market will recover,” says Chris Mayer, professor of real-estate finance at Columbia University. “We’re seeing four to five million homes — nine to ten months of inventory — that is sitting kind of broken.”

But Mayer also warns of the risks of moving too quickly to try to clear out these pending foreclosures “without a clear path of who the buyer is,” given the current housing overhang. He suggests a greater push to make mortgages available to those who want them, as bank lending standards are still very tight and even creditworthy buyers may be having trouble getting loans. As more foreclosed homes come onto the market, Mayer says, “you need people to buy these homes, and they can’t get credit.”

 

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