By Margaret Chadbourn

WASHINGTON | Thu Oct 13, 2011 7:36pm EDT

(Reuters) – The paralyzed U.S. housing market is once again up against an obstacle it has seen before — mounting foreclosures.

And a fresh drop in home prices is likely to result.

Banks have stepped up the pace of home seizures after a year-long slowdown brought on by the “robo-signing” scandal in which banks were accused of seizing properties without a proper review of loan documents.

The number of foreclosure filings — which include default notices, scheduled auctions and bank repossessions — edged up 0.3 percent in the third quarter, reversing a trend of three straight quarterly declines, according to real estate data firm RealtyTrac.

The increase was driven by a 14 percent jump in default notices, the first gain in five quarters and a sign lenders were preparing to step up repossessions of homes.

Foreclosure filings began dropping off in September of last year as major lenders halted property seizures to ensure their paperwork was in order.

Housing prices have begun to stabilize and shift higher in recent months. The S&P Case-Shiller index of home values in 20 U.S. cities rose 0.9 percent in July, its fourth straight monthly increase, as 17 of the cities posted gains. Despite the improvement, it remained 4.1 percent below its year-ago level.

If a fresh flood of foreclosed properties hits the market, housing prices will likely take another leg down. Banks price foreclosed homes with an eye toward a quick sale.

“Increased foreclosure filings will continue to erode house prices,” said Ed Delgado, a former Wells Fargo senior vice president and CEO of the Five Star Institute, a mortgage-education provider.

“The question is, at what point do you reach the bottom of the market?” he asked.

Delgado says he does not see any signs of recovery in the foreseeable future, and says things will get worse before they get better. He also worries the bottom might not be hit until the third quarter of next year.

PUSHED TO 2012

RealtyTrac warns that as many as 1 million foreclosure actions that would have taken place this year will be pushed into 2012.

The firm also says they do no expect to see home price appreciation until the housing market works through the backlog of distressed assets, and the overall malaise in the sector could continue for the next three to four years.

“Banks are beginning to process foreclosures again after taking the time to get their paperwork in order. They’ve done the diligence they needed to do,” said RealtyTrac chief executive James Saccacio. “Now there’s this wave coming back in and more defaults are being processed.”

Foreclosure activity weighs on overall home prices by adding a bulk of supply on the market at cut-rate prices, leading other would-be sellers to lower theirs in order to compete.

A high level of foreclosure can lead potential buyers to worry prices have further to fall, which could leave them cautious about buying even though mortgage rates are at historical lows.

Home prices are already about 31 percent below peaks hit during the height of the housing boom in 2006, according to the 20-city S&P/Case-Shiller index.

A survey by MacroMarkets LLC showed economists expect home prices to rise just 1.1 percent a year through 2015. That is less than a third of the annual pace clocked in the 13 years that preceded the housing bubble, the survey found.

Not everyone, however, thinks a fresh supply of foreclosed homes will push prices lower.

“The problem has been declining prices but that may be reversing,” said Joseph LaVorgna, chief economist at Deutsche Bank Securities in New York.

“I would not bet against housing just yet. There may be some light at the end of the tunnel.”

Wall Street Journal, October 7, 2011

Q. I am a single professional in my 20s who rents with a few roommates. I read your comments about how Austin is a good place to invest in property, given the volatility of the stock market. I, too, am considering it. I am thinking of buying a three-bedroom, $150,000 house in a good neighborhood. With help from my family, I can put 20% down. If I rent out the extra two rooms, the income will cover the property tax and mortgage. But I travel a lot for work and I am not sure whether my company will transfer me or if I even want to stay in this area. Should I do it?

–Austin, Texas

A. I applaud your desire to invest in your financial future. And landlords get generous tax breaks while collecting rental income. But from what you’ve told me, I recommend holding off buying a home.

Managing a property—which includes screening tenants, collecting rents, paying bills and keeping the lawn mowed—while you are traveling is difficult. But my bigger concern is that you are not sure if you are even going to stay in the area. Unless you buy a fixer upper at a discount, rehab it and resell it quickly, the only way to make money in real estate is to hold on to a property until it appreciates. Even though prices have been rising in Austin, you will need to stay in the area for at least a few years to recoup your costs on a market-rate house.

As a homeowner and landlord, you will have many expenses besides taxes and a mortgage. Assuming you put 20% down on a $150,000 house in Austin, you will have to pay an estimated $4,938 in closing costs, according to Zillow’s calculator. You also will have to budget for repairs and maintenance—expect to pay between 1% and 3% of the home’s purchase price each year—as well as for repainting and freshening the rooms when tenants move out. You will need insurance, and if you have a homeowners association, you will have to pay dues. When you sell, you will have to pay a broker’s commission, probably around 6% of the selling price, and some fix-up costs.

Rental income will help to defray these expenses, but you cannot depend on a steady stream. There will be periods when one or more of the rooms will be vacant, and you may have to shoulder some extra costs to evict someone who doesn’t pay the rent. You should have about six months of mortgage payments in reserve to cover these possibilities. You also should have cash on hand to handle expensive emergencies, like a furnace that conks out in a cold snap. Since you will have to tap family funds for a down payment, it doesn’t sound like you have enough of a cushion yet.

That doesn’t mean that you should give up on the idea of owning property. Just postpone it until you know where you will live and are on a more solid financial footing. In the meantime, continue to familiarize yourself with various neighborhoods and properties, talk to lenders and work with a real estate agent who understands your situation. Then you will be in a position to act when you are ready to put down roots.

Write to June Fletcher at fletcher.june@gmail.com.