by Calculated Risk on 8/12/2007 12:53:00 PM

David Streitfeld writes in the LA Times: Foreclosures may spur price drops

Major lenders are repossessing homes in Southern California much faster than they can sell them, a development that could set off a downward spiral of price cuts and more foreclosures.

At some point -- maybe this fall, maybe in 2008 -- the lenders' inventories will grow so large that they will have no choice but to start aggressively cutting prices, many agents and analysts predict.

That, in turn, will put more pressure on individual sellers, who will have to reduce their own prices if they want to find a buyer.

As values fall, more people could lose their homes, which would swell the lenders' inventories anew.

This potential downward spiral - price cuts leading to more foreclosures leading to more price cuts - is a real possibility.

Not mentioned in the article is the probable negative impact on new home sales and housing starts when the lenders start cutting prices. Right now the homebuilders are being more aggressive than the lenders with price cuts (and incentives), while the lenders are playing catchup:

[Jason Bosch, president of Home Center Realty, an Inland Empire firm] cited one house in Perris that a lender listed for $427,000. Home Center received an offer of $419,000, but the lender said it wouldn't budge. The would-be buyer moved on to a more flexible seller.

Ten days later, the lender lowered the price to $417,000, where it still sits.

The lenders move slowly, but eventually they will cut their prices.