The Foreclosure Backlog

If a bank forecloses on a few houses amidst a generally healthy housing market, it repossesses and sells them. Ultimately, the bank recoups a large share of its lending losses, the foreclosed-on family gets out from under an obligation to pay bills it can’t afford, and a new family gets a home. But when mass foreclosures hit, you get a glut:

All told, they [i.e., banks] own more than 872,000 homes as a result of the groundswell in foreclosures, almost twice as many as when the financial crisis began in 2007, according to RealtyTrac, a real estate data provider. In addition, they are in the process of foreclosing on an additional one million homes and are poised to take possession of several million more in the years ahead.

Five years after the housing market started teetering, economists now worry that the rise in lender-owned homes could create another vicious circle, in which the growing inventory of distressed property further depresses home values and leads to even more distressed sales. With the spring home-selling season under way, real estate prices have been declining across the country in recent months.

Part of the problem here is simply one of expertise. In principle, there could be such a thing as a firm that owns large swathes of single-family homes and manages and lends them. A bank that forecloses on lots of homes could operate such a firm as an income generating subsidiary. Or it could sell a huge tranche of houses to such a firm. But in practice, this isn’t really a business anyone’s in. Large-scale rental property management happens overwhelmingly in the small minority of American housing units that are multifamily dwellings. Consequently, we manage to simultaneously have a deficit of homes relative to households and a surplus of homes relative to homebuyers.