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When Foreclosures Are Good for the Housing Market

This is, of course, not good news for borrowers in default who may be hoping to stay in their homes.

But, ironically, a steady supply of foreclosed homes might actually help buyers in most markets.

The number of homes available for sale at the end of 2012 was at an 11-year low, according to National Association of Realtors. According to data from, inventory declined 16.5% from a year earlier in January.

The shortage of homes available for sale is driving prices higher, resulting in bidding wars in some cities and sparking concerns that another bubble might be starting.

Rising home prices should normally encourage more Americans to sell their homes to trade up, but the crisis has left millions owing more than their homes are worth. Many are still on the fence, waiting for prices to move up further so that they can sell at a profit.

The supply from new construction, meanwhile, is likely to take a while to hit the market.

So it turns out that foreclosures are now welcomed in some markets where buyers are struggling to find a good bargain.

Foreclosures are no longer so much a drag but a "stimulus," according to Blomquist. In markets where foreclosures are on the decline, prices are rising. In others where foreclosures are rising, they are providing inventory to buyers.

The bottom line is, volatility in foreclosure levels may not matter so long as underlying demand remains strong.

-- Written by Shanthi Bharatwaj in New York

>To contact the writer of this article, click here: Shanthi Bharatwaj.

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Disclosure: TheStreet's editorial policy prohibits staff editors and reporters from holding positions in any individual stocks.
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