Home prices seen dropping 10% in US on foreclosures

April 3 (Bloomberg) -- As many as 1.25 million of America’s least cared for homes are headed for auction after a year-long probe into foreclosure practices kept them off the market.

Sales of repossessed properties probably will rise 25% this year from 1 million in 2011, according to Moody’s Analytics Inc. Prices for the homes could drop as much as 10% because they deteriorated as they were held in reserve during investigations by state officials resolved in February, according to RealtyTrac Inc. That month, 43% of foreclosures were delinquent for two or more years, from a 21% share in 2010, according to Lender Processing Services Inc. in Jacksonville, Florida.

“The longer a foreclosed home is in the mill, the bigger the losses,” said Todd Sherer, who manages distressed mortgage investments for Dalton Investments LLC, a Los Angeles-based hedge fund that oversees $1.5 billion. “We have a bulge of these properties coming through the system.”

Homes stockpiled less than a year sell for about 35% below the value set by lenders, according to a March 15 report by the Federal Reserve Bank of Cleveland. At two years, the loss is close to 60%. A surge of cheap foreclosures may erode prices in the broader real estate market, even as the economy expands and residential building increases, said Karl Case, one of the creators of the S&P/Case-Shiller home-price index.

‘Complete Losses’

“The question on these aging foreclosures is how many are going to be sold and affect prices and how many will be complete losses,” said Case, professor emeritus at Wellesley College in Wellesley, Massachusetts. “Depending on their condition, they could have a big impact on home prices.”

The best measure of the influence foreclosures have on the broader market is the 20-city S&P/Case-Shiller home-price index that tracks deeds, including homes sold directly by banks and deals that don’t use mortgages, said Patrick Newport, an economist at IHS Global Insight in Lexington, Massachusetts. The index probably will fall 5% to 10% this year, a range that depends on the condition of the mothballed homes, he said.

That compares with a forecast for a 2.9% decline by Celia Chen, a housing economist at Moody’s Analytics in West Chester, Pennsylvania, and a prediction of a 3.9% decline by Diane Swonk, chief economist of Mesirow Financial Inc. in Chicago.

Building Permits

While foreclosures slowed, the wider real estate market improved. As banks held onto properties, the supply of homes for sale dropped to 2.3 million in December, the lowest since 2005, before rising 4.7% the following two months, according to the National Association of Realtors. Spurred by low inventory, building permits that signal future housing demand rose 4.8% in February, from the prior month, to the highest level since 2008, according to the Commerce Department.

The Standard & Poor’s 1500 Homebuilding Index gained 13% this year through yesterday. The 11-member index declined 0.5% today as of 9:34 a.m. in New York.

The S&P/Case-Shiller index fell 3.8% in January from a year earlier, slowing from December’s decline of 4.1%, a sign of stabilization. The measure has dropped 34% from its 2006 peak to the lowest level in almost a decade.

“A lot of people look at bumps in the monthly data and say we’re reaching a bottom,” said Joshua Shapiro, chief U.S. economist at MFR Inc. in New York. “We won’t be there until this supply of foreclosures clears.”

The National Association of Realtors predicts a 0.01% gain in prices for homes sold through multiple listing services, which includes some though not all foreclosures.

The Federal Housing Finance Agency’s price index measures sales of homes with loans backed by Fannie Mae or Freddie Mac. That gauge likely will rise 0.7%, according to a forecast by the Mortgage Bankers Association in Washington.

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