Economists and real estate experts call it “foreclosure overhang,” and it is one of the big question marks that will determine when the housing market will truly recover.
The term refers to the number of foreclosed properties that will wind up on the for-sale market. In the worst case, millions of foreclosed homes offered at fire-sale prices will cause an excess supply that will dampen prices for years to come.
Lower prices are generally good for buyers. But if potential buyers worry that prices will keep falling they may shy away from the market, prolonging the problem.
So the big question is: How bad will the foreclosure problem be?
Eric Landry, an associate director of Morningstar Inc., (Stock Quote: MORN), a firm that tracks the economy and financial markets, argues that the foreclosure threat is serious, but perhaps not as bad as many people fear.
In a new analysis, he says it is a “foregone conclusion that at least four million housing units will be foreclosed upon in the next couple of years,” and he notes that other researchers put the number as high as seven million. Since annual home sales are running around 5 million, it looks like foreclosures could produce a terrible oversupply that would drive prices down.
But not all these foreclosures should be counted as new supply, Landry says. “The overwhelming majority of this inventory was built years ago and therefore is already part of the existing supply,” he says, adding that many homes likely to fall into foreclosure are listed for sale well before that happens.