The foreclosure market will bottom out sooner or later. But which?

The impact of distressed sales on residential real estate has been the biggest reason for property value declines over the past few years and it doesn’t look like we have reached the bottom yet.

A recent article in the New York Times explains, “About two million households in the country are in foreclosure, and millions more are on the verge.” Since only four million existing homes are expected to sell in all of 2010 we still have a huge problem.  In fact distressed sales were 34 percent of all existing home sales in August according to the National Association of Realtors .

The real estate market will eventually recover but it is hard to believe we have already hit the bottom of the market when more than a third of the homes for sale are selling at discounts and millions more are on the way. Real estate prices won’t rise appreciably until we cull through the excess inventory of distressed properties and that is why I find another recent development so problematic.

The entire foreclosure process in the United States seems to be grinding to a halt. Mortgage lenders and other institutions responsible for getting defaulted homes back on the market are completely overwhelmed.

JP Morgan Chase, Bank of America and GMAC are three of the largest mortgage lenders in the United States and they have all stopped foreclosure proceedings because of legal issues raised by their process of  dealing with loans in default. The legal issues raised by foreclosures have also led a major title insurance company to stop insuring foreclosed homes and that means borrowers will find it even harder to get mortgages on these properties. Without title insurance the potential buyer of a foreclosed property could be forced to pay cash and there aren’t many buyers out there with that kind of money right now. It has even gotten so bad that the governor of Connecticut has halted all foreclosures in the state. All of these problems are making it difficult for the market to correct itself and slow down the natural healing process.

Despite all of the ominous signs in the foreclosure market, every month you can still find an expert predicting that real estate prices have reached the bottom and sooner or later one of them will be right. Sooner or later the legal wrangling over foreclosures will stop and the homes will be sold. Sooner or later the market bottom will be reached and property values will once again rise. Sooner or later everything will be fine. The problem is that the sooner seems to keep getting later and later.

Hat tip to for bringing the New York Times article to my attention. You can read the entire piece here:

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