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Wave of distressed properties could bring down fragile real estate recovery in US, it is claimed

An oversupply of housing and a wave of distressed properties could drag down real estate prices in the US later this year, experts are warning. Residential property prices across 25 metropolitan statistical areas (MSAs) rose 1% in April compared to one month earlier, and 2.4% compared to a year earlier, according to the latest figures from Radar Logic.

Prices in the Midwest MSAs saw the biggest rise, up 3.5% from March, although they are down 8.8% from a year earlier. Prices in the western MSAs grew 1% from a month ago and 7.5% from a year ago.

Although prices show recent upward trends, Radar Logic warned that housing oversupply represents a major source of distress for the housing market.

Prices started stabilizing at the beginning of 2009 due to a pickup in demand as property prices were declining from relative highs. But Radar Logic said that demand could reach ‘exhaustion’ soon. And the inventory overhang of distressed and non-distressed homes is affecting prospective homebuyers’ hopes for future appreciation, it added.

‘Given the unprecedented number of homes in default, foreclosure, or REO inventory, and barring some unforeseen exogenous boost to housing demand, the price stability we saw in 2009 will likely come to an end in the second half of this year,’ Radar Logic said in its report.

It also pointed out that the volume of houses in real estate owned (REO) status or a state of serious delinquency is steadily rising. The national REO inventory is more than 478,000 homes. Of that Fannie Mae owns 23%, Freddie Mac 11% and the Department of Housing and Urban Development owns 10%. All together, the government owns about 46% of the total REO inventory.

After adding in seriously delinquent mortgages, Radar Logic estimated that 3.1 million properties are either in the government’s REO inventory or heading towards it. With an assumed average mortgage balance of $200,000, the value of these distressed assets could reach $614 billion, it said.

Since REO inventory, by nature of being distressed, tends to sell at a discount, the government could lose billions. Radar Logic estimated that an average REO liquidation rate is 40% lower than actual values, so some $246 billion could be lost.

The latest figures from the Treasury Department show that fewer homeowners are missing mortgage payments but foreclosures are surging as many loan modification efforts fail. The report raises the prospect of a new surge of foreclosed homes flooding the market at a time when home sales already are tumbling due to the expiration of federal tax credits for buyers.

Sales of new homes fell 33% last month to the lowest level on record, according to the US Commerce Department. And a new from the Mortgage Bankers Association said applications for home purchases and refinancings fell again despite the availability of the lowest fixed mortgage rates in more than a year.

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