Flooding the Market

I don't have a lot of time today to write (still have guests in town and I'm actually quite exhausted), but I wanted to toss out a couple of related thoughts.

1) Foreclosures are rising to un-heard of rates. People are defaulting and banks are getting stuck with over-priced housing.

2) If the banks put the houses back on the market, they'll essentially flood the market with "desperate sellers". Sellers who are looking for the best quick price, not the best possible price.

I've heard from friends in the industry that banks are sitting on houses that they don't want, because they fear that if they put all of their houses on the market right now, it'd completely destroy the housing industry. Entire towns could go through an extremely painful price correction (though no one mentions that those are the same towns that went through extreme price inflation to begin with).

As always, it's worth mentioning that paper profits are not profits until you cash them in.

Anyways, this currently leads me to two conclusions.

1) The housing price drops that we are seeing (of 1% or so) should be worse than they are, but the banks are trying to prevent al all-out panic. It could be a good long while before prices start to climb (bank inventory will continue to leak out in small doses for years).

2) The banks are going to take large hits for this. Holding houses costs them a lot of money, money that they can't use to generate other profits. Profits from investment banking will probably fall a bit over the next 5 years (unless there is another boom that they can reap "transaction fees" from, like the private equity boom).