The expected drop in future home prices over the next few months could depend less on mortgage rates and buying trends than on how banks manage their OREO (other real estate owned) portfolios, know as REO by investors. The huge number of foreclosed homes being reclaimed by banks, is starting to occupy a large portion of most banks’ balance sheets. They are going to have to unload them soon to free up loan capital for future loans. Because banks don’t have any emotional attachment to the foreclosed houses they sell, they tend to drop prices to a greater degree to unload properties quickly. With so many banks accumulating so many properties, unleashing them on the market will flood the market and make prices plummet.
The Wall Street Journal reports that “Price declines that began four years ago accelerated rapidly in 2008 as banks dumped foreclosed properties at fire-sale prices. By January 2009, the share of distressed sales had soared to 45% of all sales nationally; it was even higher in hard-hit markets such as Phoenix, according to analysts at Barclays Capital.”