Foreclosures Continue to Drag Down Home Prices

During the first quarter of 2011, U. S. home prices fell 5.5 percent from a year earlier, the biggest decline in almost two years, as sales of discounted foreclosures continue to undermine real estate values.

According to the National Association of Realtors (NAR), the U.S. median home price has slumped 30% from its 2006 high of $227,100 to $158,700 for a single family house.

The NAR blamed much of the latest price drop on sales of "distressed" property, in which banks have agreed to let properties sell for less than their loan balances. Foreclosures and short sales have accounted for about 39 percent of transactions this year, up from 36 percent from a year earlier.

Home mortgage loans backed by Fannie Mae or Freddie Mac, have fallen for 15 straight quarters according to the FHFA, as lenders seize homes and sell them at cut-rate prices that drag down overall values. “Dumping foreclosures on the market and selling them at distressed prices affects the whole real estate market,” said Richard DeKaser, an economist at Parthenon Group “It puts downward pressure on prices, even for homes that aren’t in foreclosure.”

"We're seeing prices dropping faster than they did in 2010," said Pat Newport, an analyst with IHS Global Insight. "That's troubling. Falling home prices precipitated the recession and are slowing the recovery.”

Falling home prices are resulting in more homeowners owing more on their mortgage balances than their homes are worth, increasing the potential that more homeowners will default on their loans.

"That's a key problem," said Newport. "There are a lot of bad loans in the foreclosure pipeline and we don't know how many strategic defaults [people walking away from their mortgages] will result."

About 6.4 million mortgages were either delinquent or in foreclosure in April, according to Florida-based mortgage-transaction and data firm Lender Processing Services Inc. Foreclosures typically sell at a 28 percent discount to non-distressed properties.