That is what I am hearing from the pundits on Wall Street and the mavens in the real estate market. In order to get rid of the REOs (that’s Real Estate Owned properties) the banks are allowing massive auctions to take place.

It is not the McMansions that are being sold, but the $350,000 homes that are moving off their books at $150,000 to $200,000. Banks do not want to hold these depreciating assets. They are not set up to be in the real estate business. They are willing to take losses of hundreds of thousands and in many cases millions of dollars to get them off their books as they are a drag on their reserve status.

At the auctions there are investors who believe the market has bottomed and are buying 5 or 10 or more properties at what looks like today are big discounts. They plan to rent them at maintenance cost and then flip them when the market shows a 10% or more profit.

John Q. Public is being suckered in to buy now before the market shoots up and they miss this great opportunity. And pigs can fly.

But what if it doesn’t!

Let’s look ahead. What we see today is the problem of subprime mortgages has pretty much been resolved. That makes up a large portion of the foreclosure market.

Quietly none of the real estate experts are mentioning the increase in delinquencies in the AltA and prime mortgage paper. Foreclosure and delinquency rates on these mortgages are now climbing to spitting distance of the subprime paper and the numbers are much bigger. This coming year more than a million of these mortgages will have their contracts up for renewal.

Will folks who are now current on their payments be able to handle a 50% to 80% increase? Some will, but many will not. This will again cause pressure on all home prices as there will be huge numbers of “walk-aways”.

Currently there are a million and a half vacant homes. Somebody needs to buy them. Here is the kicker. Household formations have dropped by more than 50% since last year when there were over 1.6 million new households. The current rate is about 750,000. The kids graduating from college and other young people are staying home with Momma. They can’t find a job.

The key to home prices is employment. Washington now admits to 9.5% unemployment and one Senator recently spilled the beans during a hearing saying it was really 16%. The foreclosures of homes and the price decline are not going to halt until employment picks up. Those “investment homes” will not find renters.

All of the present Washington solutions to this problem are going in the opposite direction.

Unfortunately the folks buying today’s foreclosures for investments in many, many cases will have their foreclosures foreclosed upon them.

Copyright 2009 Albert W. Thomas All rights reserved. Author of "IF IT DOESN'T GO UP, DON'T BUY IT!"