Vacant Homes Will Drown Housing Recovery

Justin Sullivan | Getty Images

A real estate source I knew recently told me about a guy he knows in Atlanta who has been hired by several different banks to winterize their REO's (real estate owned, i.e. the bank-owned foreclosures).

The homes are abandoned and empty, and clearly the banks think they're going to stay that way for a while.

The winterizer didn't want to do an interview, for fear he would lose his clients, the banks, who might not want us all to know about this.

A new study by an economist at the Cleveland Federal Reserve finds today's foreclosures stay vacant far longer than the historical norm. Studying one Ohio county, Stephan Whitaker found, "foreclosed homes go through more than a year of very high vacancy rates following the auction and are substantially more likely to be vacant up to 60 months after the foreclosure." The higher the poverty rate in the area, the longer the property stays vacant.

Foreclosed homes obviously lower the value of surrounding homes, but Whitaker says the damage can go on much longer than we might think. "The data suggest that foreclosure may permanently scar some homes," he writes in his research.

Tomorrow we get the mid-year foreclosure report from RealtyTrac, which, given all the previous monthly reports, will likely show a drop in foreclosure activity overall; that is largely due to processing delays. In recent months bank repossessions, the final stage of foreclosure, have been ramping up, putting more foreclosed properties onto the bloated housing market. The banks know, of course, that the volumes are getting too high.

That's why Bank of America launched programs recently in Cleveland, Chicago and Detroit to demolish some of the most run-down foreclosures in the worst neighborhoods. Interestingly, the Cleveland program is in the same county studied by Stephan Whitaker, Cuyahoga.

“Unfortunately, many homeowners faced with unemployment, underemployment and other economic hardships have transitioned to alternative housing situations, and in many cases have walked away from their homes, leaving behind vacant and deteriorating properties that can cause neighborhood blight,” said Rebecca Mairone, national mortgage outreach executive for Bank of America Home Loans in a press release last month.

The demolition hasn't started yet in any of the three cities, as there's obviously a lot of paperwork involved, but programs like this may become more common, especially in poverty-stricken neighborhoods. Other big banks are considering doing the same.

In June RealtyTrac reported 1.7 million homes in some stage of foreclosure. There are over 6 million homes either in foreclosure or in some stage of mortgage delinquency. Compare that to the annualized rate of existing home sales in June (most not REO sales) of 4.77 million units. This is an enormous supply of housing stock, not even including the supply of newly built homes for sale right now (164,000..I know, a pittance), at a time when consumers have made a major shift toward renting.

We talk a lot about home price stabilization, and in nice neighborhoods with little supply, prices are holding steady. Sure, everyone thinks the problems are all out in Arizona and Florida, but the latest wave of foreclosures is widespread; I'm talking about the ones we can attribute to unemployment and the recession, not to subprime lending (which almost sounds old now). Cities like Atlanta, Seattle, Chicago, Minneapolis are all seeing rising foreclosures and rising stock of REOs.

In all the numbers, all the monthly reports, all the ever-moving data, I think we often lose sight of basic supply and demand. Supply continues to grow in existing homes, and demand, which demographically speaking should be there, is starving right now for confidence.

Questions? Comments? RealtyCheck@cnbc.comAnd follow me on Twitter @Diana_Olick