3 Ways Foreclosures Will Stunt Growth

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The foreclosure scandal rolls on, and now it’s become only too apparent that the robo-signing issue is going to hurt the U.S. housing market. But how, specifically?

Here, we look at three ways the foreclosure crisis could put the real estate market back in the red.

Too many foreclosed homes

The biggest problem right now is that foreclosures are running rampant, so quickly that the documentation can’t keep up, and efforts to sell foreclosed homes have suffered because of it. According to RealtyTrac, lenders foreclosed on 102,134 U.S. homes in September – that’s the first time foreclosures ever passed the monthly 100,000 mark. Plus, foreclosure sales accounted for 31% of all U.S. residential real estate sales in September, so when almost one-third of all homes are taken off the market until banks review their foreclosure practices, that severely impacts U.S. home sales.

The coming housing glut

Those foreclosed homes taken off the market won’t be on the shelf forever. When banks and lenders finally get their act together and put those foreclosed properties back on the market, we’ll see a glut of homes for sale, which will surely drive home pries down again. It’s economics 101: The more properties on the market (increased supply), the lower the prices (reduced demand).

Unless the housing market sees a big boost in Americans looking for new homes - and we haven’t seen much evidence of that in the last two years – look for a housing glut when all of those foreclosed homes are back on the open market.

Banks restrict lending

Reason number three? While banks grapple with suspended foreclosures, they lend less money to would-be homebuyers. Fixing the foreclosure mess isn’t free for banks, and the distraction alone limits the amount of attention banks can give to their primary breadwinner, loaning money. Plus, the amount of bad loans on their banks doesn’t go down as fast – not with more homeowners taking lenders to court, and more homeowners staying in their homes longer as the foreclosure fix grinds along.

That means banks are stuck holding toxic loans on their books for longer. Banks need to set money aside to balance out the negative side of their loan ledger, and that will leave them with less money to lend to borrowers.

It’s not a pretty picture and the timing is particularly harmful. But lenders and borrowers will just have to wait for the foreclosure debacle to play itself out – and hope the fallout isn’t too much to bear.

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