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Foreclosure freeze shakes battered home market

By Chris Isidore, senior writer

NEW YORK (CNNMoney.com) -- Get ready for a bumpy ride in the housing market.

The growing number of freezes on home foreclosures is likely to shake up the struggling U.S. housing market. Experts say home prices could rise in the short term, but the eventual glut of foreclosure sales could hurt the market in the long run.

The move by some major lenders such as Bank of America (BAC, Fortune 500), JPMorgan Chase (JPM, Fortune 500) and Ally Financial to put some of their foreclosures on hold could help temporarily lift prices, by removing the inventory of bargain-basement foreclosed properties from the market.

"Home prices are likely to be firmer than otherwise would be the case in the fourth quarter and into early next year," said Mark Zandi, chief economist at Moody's Analytics.

While that's good news for the economy, the effects might be short lived. That's because the foreclosure freezes are also likely to delay sales of the huge inventory of foreclosed properties, which would hinder a long-term recovery in prices.

"It'll probably push out the distressed sales into 2011 and 2012," said Zandi.

Questions about the validity of some of the lenders' affidavits in foreclosure cases has caused the banks to announce moratoriums over the last two weeks.

Friday, Bank of America expanded its freeze on home foreclosures to all 50 states from the 23 states where foreclosures must be approved by the courts. Some of the states that were added are among those with the highest rates of foreclosure sales, including California, Nevada and Arizona.

If freezes spread to other home lenders, or if other lenders follow Bank of America and expand their moratoriums, it could greatly increase the impact on the market.

Distressed sales through foreclosures or short sales now make up nearly a third of the residential real estate market, according to an estimate from home sales research firm RealtyTrac, which estimates they are depressing home prices by about 26%.

Any short-term rise in overall home sales is likely to be misleading, said Rick Sharga, RealtyTrac senior vice president, as the numbers might be skewed by the loss of rock-bottom foreclosure sale prices from the market.

"You might get a false positive read on fourth quarter home prices because you'll be eliminating a lot of sales at the bottom of the market," he said. "There are so many factors distorting the market, it's tough to get an accurate read."

He thinks the freezes could cause lenders to move toward more short sales, in which the bank agrees to a sale for less than the balance of the mortgage. That could lead to a more substantial impact on market prices.

"It might stimulate a little more short sale activity, as lenders and servicers look for ways to more efficiently move the property outside the foreclosure," said Sharga. "Typically your discount on short sales is only 15%, compared to 35% for a [foreclosure sale]."

Just the level of uncertainty about the halt in foreclosures has the potential to depress home sales as buyers wait to see what foreclosed homes might be coming on the market in the future.

A prolonged delay in foreclosures could also hurt long-term prices by driving investors who had been returning to the real estate market to invest elsewhere.

"Some of the money that is waiting to go to [into foreclosure sales] might evaporate and those sales could be lost," said Zandi.

And the delays could further depress the value of all homes in areas with high numbers of foreclosures by keeping the houses vacant longer and delaying a correction in the market.

"I would think anything that delays the disposition of these properties has the potential to further depreciate surrounding home value," said Sharga. To top of page

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