James R. Hagerty and Kris Hudson / WSJ | March 25, 2008

A glut of foreclosed homes of historic proportions is starting to drive down U.S. home prices faster as lenders put more properties on the market and buyers show signs of interest.

The ability of America’s lenders to manage this fire sale will be crucial to determining how long the housing market stays in the dumps — and how quickly blighted neighborhoods can heal. The oversupply is severe: In some major markets, including Las Vegas and San Diego, foreclosure-related sales have accounted for more than 40% of all sales in recent months.

On Monday, new data suggested that pressures like these are starting to drive prices low enough to attract some buyers back into the market. Sales of previously occupied homes jumped 2.9% in February from the month before, the National Association of Realtors said, the first increase since July.

The median price dropped 8.2% from a year earlier to $195,900, the biggest drop recorded by the Realtors in the current slump.

In some beaten-down markets, the price cuts have been stark. The Detroit Board of Realtors recently found that home sales in the city (excluding suburbs) in the first two months of this year jumped 48% from a year earlier, to 1,540. The average home price there sank 54% to about $22,000.

‘Got to Move Things’

Banks and others holding foreclosed property have concluded “we’ve got to move things” and are finally willing to slash prices, says Thomas Lawler, a housing economist in Leesburg, Va.

At the same time, the specialist firms that sell foreclosed homes for lenders say banks are sending them additional properties much faster than they can be sold. “They’re coming in [at a rate of] two new properties for every sale,” said Claudia Smith, vice president of operations for First American REO Outsourcing, which is handling roughly 8,000 foreclosed homes for lenders.

First American CoreLogic, a research firm based in Santa Ana, Calif., that collects data from lenders and county clerks, estimates that foreclosed properties represent roughly one of nine currently listed for sale nationwide, compared with a one-in-15 ratio a year earlier.

“This is both a crisis and an opportunity,” says Rafael Cestero, a senior vice president at Enterprise Community Partners, Columbia, Md., a national nonprofit group that invests in housing for low-income people. Clusters of empty, foreclosed homes attract criminals and hurt neighborhoods by undercutting property values for everyone. Brenda Lawrence, mayor of Southfield, Mich., where about 3% of all single-family homes are in foreclosure, calls foreclosed homes “a cancer.”

But foreclosures also can help bring prices in high-cost areas down to levels that are affordable to teachers, fire fighters and other middle-class buyers who may have been priced out of the market during the housing boom.

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