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Home Sellers Slashing Prices, While Banks Mow the Lawn

AP

That heady buzz from the home buyer tax creditis now turning into a grinding headache, as home sellers realize their very temporary, government-induced catbird seat has now fallen back to earth.

As of July 1st, 24 percent of sellers on the market had cut their asking prices at least once, according to Trulia.com.

That's up 9 percent from the previous month and represents about $27 billion worth of vanished national home equity (or home equity hopes).

"The market is going to maintain a relatively flat trajectory, if not more like a saw tooth trajectory, for the near future, and meaningful recovery may not happen until some time in 2011, 2012," says Trulia's Heather Fernandez.

Shocking? Not so much.

We knew the price stabilization was largely due to increased buying activity on the low end from the home buyer tax credit. The issue now, front and center, is foreclosures. We've already seen a few reports, and I expect we'll see more, that show new foreclosures "stabilizing," while bank repossessions are increasing.

First of all, the stabilization is at such a high rate that it's clearly an unsustainable stabilization for the economic recovery. New foreclosure notices need to drop, not just bump around at their near-record highs. And frankly the bank repossession number is a much bigger deal, because that is going to translate into immediate inventory on the market.

Do banks hold on to foreclosure inventory?

Of course they do, but in Los Angeles at least, they're getting a big incentive to dump it fast. L.A. last week passed a new city ordinance that fines banks, servicers, whoever owns the foreclosed property, up to $100,000 for letting the property fall into disrepair. We've heard and seen plenty of stories about run-down, stripped homes littering the landscape, with their overgrown lawns and broken front fences standing as glaring examples of what is not recovering in the housing market.

I wouldn't be surprised if more big cities do the same, and I'd encourage them to do so.

Let's face it, banks don't want to be homeowners, and they certainly don't want to shell out even more of their dwindling cash on lawn services and handymen. Whatever incentives there are out there to turn these properties over to homeowners who can actually afford them are certainly welcome.

The trouble is that there appears to be a dangerous disconnect in the housing market right now: Housing starts are at an all-time lowand yet the home vacancy rateis rising. The only way that can happen is if the number of households is shrinking more than we know. Add bank repossessed homes to that mix, and I'm guessing home prices will dip more than some are expecting.

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  • Diana Olick serves as CNBC's real estate correspondent as well as the editor of the Realty Check section on CNBC.com.

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