Therefore, we have seen increased interest in whether anything can be done to reduce the overhang of empty and foreclosed homes.13 We estimate that about one-fourth of the excess supply of vacant homes for sale in the second quarter of 2011 was owned by creditors; these homes are often referred to as real estate owned, or REO properties.14 Moreover, Federal Reserve staff estimate that distressed sales, which include both short sales and non-auction sales of foreclosed homes by REO holders, now account for 30 percent of home sales.
Although it is difficult to forecast future REO flows, we estimate that an additional 1 million foreclosed properties could be added to the REO held by banks, guarantors, and servicers in each of the next few years. These inflows will continue to exert downward pressure on home prices.