Foreclosures May Endanger Economic Recovery

By Kyle Chezum Updated on 1/28/2011

1/28/11

Joseph Tracy, an executive at the Federal Reserve Bank of New York, fears the economic recovery may be hindered by a swelling tide of foreclosures.  This is contrary to views expressed by many economists, who predict the recovery will kick into high gear this year.

“We are only halfway through the resolution process,” Tracy said, referring to the ongoing foreclosure crisis.  “Downward pressure on house prices and new construction” will likely continue through at least the end of the year.  An excess supply of homes has increased inventory available on the market, keeping home prices low.  Tracy expects additional foreclosures to add to this overburdened inventory and drop home prices further.

2010 saw a major increase in foreclosures all across the nation.  Almost 72% of metropolitan areas suffered an increase in foreclosure filings.  All told, foreclosure struck one out of every 45 homes.  Much of this activity occurred in regions that hadn’t seen significant foreclosure activity the year prior, such as Houston and Seattle, which both saw foreclosure increases of approximately 25%.

But even these high numbers may not reveal the whole truth. Many major banks and lenders ceased foreclosures in 2010 due to accusations of robo-signing and other fraudulent activity.  Most of these banks have now resumed processing foreclosures.  The moratoria caused a major buildup in the foreclosure pipeline.  Currently, more foreclosures are beginning each month than ending, hinting that worse days may lie ahead for foreclosures.

The fourth quarter of 2010 saw a GDP increase of 3.2%   The third quarter brought an increase of just 2.6%.  The recent GDP increase was founded upon a 4.4% quarterly increase in consumption.  The market hasn’t seen a quarter-over-quarter increase this large in close to five years.  But some economists, including Tracy, feel that the economy simply can’t recover without steady improvement in the housing sector, and additional foreclosures may hinder this.