Still To Come: Millions More Foreclosures

Marcio Jose Sanchez/AP

The inventory of unsold houses skyrocketed this summer, as new homes came onto the market much faster than new buyers appeared. It was one of several signs that home prices might start falling again.

But all those unsold houses are only part of the story. Besides the 4 million or so homes up for sale right now, there are another 600,000 homes that banks have foreclosed on but not put onto the market yet.

On top of that, there are millions more houses whose owners are in the early stages of foreclosure, or are more than 90 days past due on the mortgage. A large percentage of those will ultimately be foreclosed on.

In all, there is a "shadow inventory" of some 3 million foreclosed homes that are likely to come onto the market over the next three years, Rick Sharga, senior vice president of a company called RealtyTrac, told me today.

All those foreclosed houses and apartments up for sale will put lots of downward pressure on home prices. Whether and how much prices fall will depend on a bunch of factors, including whether there's more intervention from the federal government.

Banks, meanwhile, seem to be slowing the foreclosure process down.

In August, banks repossessed more than 95,000 homes, the most for any month since RealtyTrac started tracking the figures in 2005, the company said today.

At the same time, though, the number of default notices that homeowners receive at the beginning of the foreclosure process fell during the month.

That doesn't necessarily mean fewer homeowners are in default; instead, Sharga said, it may the latest sign that banks are slowing down the foreclosure process.

There are a few reasons it's in banks' interest to slow the process down.

Fore one thing, banks hold lots of mortgages on homes that have lost value. But they don't have to take that loss on their books until they actually sell the house at a loss.

"It's on their books at $500,000, but the real-world value is $250,000," Sharga said. "You start multiplying that by all the homes in your portfolio and it adds up pretty quickly."

So the banks are waiting until they raise more capital to absorb the losses, or until the market picks up a bit, he said.

What's more, banks don't want to flood the market with repossessed homes all at once. Better to spread the sales out over a longer period of time, the thinking goes, so that the impact on prices won't be as acute.

"If all of this property hit all at once, there would be a smoking crater where the housing market used to be," Sharga said.

One other reason banks may be slowing the process down: They just can't keep up. The volume of foreclosures is 10 times as high as it was a few years ago.