Home prices will decline by 40 percent in the third and fourth quarter next year as more foreclosed new homes enter the U.S. market, based on a price forecast by Michelle Meyer, economist of Barclays Capital.

Meyer predicted that foreclosures will reach their peak levels late next year.

The economist based her forecast on a survey by Reuters and the University of Michigan showing the belief of consumers that it is now the right time to buy because of low mortgage rates and low prices of foreclosed new homes and other homes.

She predicted that the sales of foreclosed new homes and other pre-owned homes will reach 5.41 million next year, up from the expected sales of 4.75 million this year. She also predicted that sales of newly-built homes will increase to 440,000 units next year, up from the expected total sales of 350,000 units this year.

Based on Meyer’s sales forecast, sales of foreclosed new homes and other existing homes are still far above sales of newly-built homes.

Meyer released her home sales and price forecast just two days after Standard & Poor’s Corp. released its Standard & Poor’s/Case-Shiller 20-City Home Price Index which showed a year-over-year home price decline of 18.1 percent in April this year.

The S&P/Case-Shiller price index has been tracking the prices of single-family houses in 20 of the country’s largest metro areas since 1987.

The index also showed that home prices have declined by more than 32 percent from their highest level in 2006. Home prices would need to decline by a further 11 percent to get to the 40- percent price decline predicted by Barclays economist Meyer.

The S&P/Case-Shiller study said that the current pace of foreclosures could endanger metro areas which have not reached worrisome levels of home prices. The study mentioned Denver which had the smallest price decline – 4.9 percent – which could increase if the foreclosure problem widens further its reach.

Based on the S&P data, New York City was the only large metro area which had an above-average month-to-month home price declines both in March and in April. House prices in New York had an overall decline of 12.5 percent in April compared to April 2008.

Meyer expects an increase in sales of foreclosed new homes and other pre-owned homes as she expects an annualized growth in the country’s gross domestic product starting this third quarter.

Foreclosed housing inventories will reach their highest levels in the third and fourth quarter next year, according to Michelle Meyer, a top economist at New York-based Barclays Capital.

Meyer predicted that sales of foreclosed houses and other pre-owned homes will increase next year to 5.41 million, compared to the 4.75 million foreclosed housing units expected to be sold this year.

She also predicted that sales of newly-constructed homes will jump to 440,000 in 2010, compared to the 350,000 units expected to be sold this year.

The economist based her forecasts on various data related to the recession, unemployment rates, consumer confidence and other financial data.

Meyer’s new-home sales forecast of 440,000 for 2009 would make this year the lowest in sales of newly-built homes since 1963, based on Census Bureau data.

In the meantime, economist Lawrence Yun predicted that foreclosed housing units this year will reach 2.5 million units.

In May, sales of pre-owned homes and foreclosed housing units increased by 2.4 percent to 4.77 million on an annualized basis, which was lower than the predicted figure. The median home price declined by nearly 17 percent compared to May 2008.

Meyer also predicted that home prices will drop by 40 percent in the third and fourth quarter next year. She explained that despite federal and state foreclosure prevention programs launched this year, foreclosure inventories will continue to grow and house prices will continue their downward slide, although at a slower rate than the pace in previous months.

Home prices may fall by another 7 percent, Meyer added, based on the home price decline index released by Standard & Poor’s Corp. this week. The S&P/Case-Shiller 20-City Home Price Index showed a drop of more than 18 percent in April on a year-over-year basis. S&P has been tracking the prices of single-family houses in 20 of the nation’s large metro areas since 1987.

The Standard & Poor report said that the three-year foreclosed housing problem has clipped nationwide home prices by about 33 percent since July 2006 when house prices were at their highest levels.

In many markets, foreclosed housing inventories are not being significantly reduced because prospective home buyers are being hindered by the rising mortgage rates, poor credit and lack of financing.

According to a group of real estate analysts and brokers, it would take nearly ten months to sell all unsold foreclosed housing units and other unsold homes based on the current pace of home sales.

While sales of previously owned homes nationwide increased by 2.4 percent in May from April, sales of lower-priced foreclosed homes for sales and other pre-owned homes priced increased more significantly, although rates varied according to locations.

In Maryland, sales of homes priced below $300,000 soared by 41 percent in May.

On the other hand, sales of homes priced between $300,000 to $700,000 fell by 26 percent in May. For houses priced above $700,000, sales have been slow, prompting housing analysts to contend that it would take more than 3 years to sell all houses priced above $700,000 if current sales pace for this price level do not change.

Real estate analysts said that the factors for the increased sales pace for foreclosed homes for sales and other pre-owned homes priced below $300,000 include the $8,000 federal tax credit program which is expiring in November this year, the increase in number of first-time home buyers and the effects of the recession, including job losses.

Analysts say that more people now are daunted by large home loans, fearing they would not be able to afford higher-priced homes if the economy does not improve soon.

Many realtors have also been shifting their focus on lower-priced foreclosed homes for sales and other properties, saying they now prefer selling homes priced at $250,000 rather than waiting for a $1 million sale.

Real estate analysts also said that people who buy higher-priced homes typically make them their second homes, and these types of buyers have shied away from the market because of possible losses in the stock market or in their businesses. They said that houses listed at $2 million in 2007 are now listed at $1.2 million, but sales are still slow.

The other problem for houses priced above $700,000 is the lack of financing for higher-priced home loans and the higher mortgage rates for jumbo loans.

Typically also, banks require buyers of homes priced above $1.5 million to make down payments of at least 30 percent.

In San Diego, sales in the wealthiest areas in May fell by 8 percent compared to May last year while sales of foreclosed homes for sales and other properties in lower-income neighborhoods jumped by 37 percent.

Prices of foreclosed homes for sales in the lower-income areas fell by 30 percent while prices of existing homes in the wealthier areas fell by only 12 percent.

In forty of the 500 U.S. counties with the highest number of households, the pace of foreclose houses has doubled in April this year, compared to their pace in April last year.

Most of these counties are in regions largely protected from the first wave of foreclosures in 2008. In the first months of 2009, due to the persistence of the recession and continued loss of jobs, these counties have started to post big numbers of foreclosed houses. Among these counties are Boise, Idaho and Green Bay, Wisconsin.

In 2008, Idaho was only 19th in charts of state foreclosure rates; in May this year, the state jumped to 9th in the charts, with one house in 437 housing units hit with a foreclosure action.

Similarly, Wisconsin was 28th in state foreclosure charts in 2008; in May this year, the state jumped to 19th in the charts, with one house in every 731 housing units hit with a foreclosure action.

Susan Wachter, real estate scholar at the Wharton School of the University of Pennsylvania, said the ripple effect has widened the scope of the foreclosure problem.

In 2007 and much of 2008, the number of foreclosed houses soared because of subprime loan defaults. Foreclosures in the later part of 2008 and in 2009 were largely caused by the effects of the recession, particularly unemployment.

When analyzed, the foreclosure crisis has completed the vicious cycle of foreclosures causing unemployment that ultimately cause further foreclosures.

Based on data collected by real estate researchers, among the counties with the largest increases in foreclosure filings and foreclosed houses as of April on a month-over-month basis were Rock and Kenosha in Wisconsin, Washington in Minnesota, Horry in South Carolina and Franklin in Pennsylvania.

In Rock County, the rate of increase in foreclosure filings in April compared to the previous month was a staggering 1,397 percent. The closest counties that followed Rock in the list were Kenosha, with 967 percent, and Washington, with 696 percent. Other previously immune counties were York in South Carolina and several counties in Hawaii.

In Boise, Idaho, the high unemployment rate has pushed the monthly average of foreclosed houses to over 700 housing units this year, compared to around 300 in 2008.

Indeed, as HUD Deputy Secretary Ron Sims said, these previously economically strong counties are now suffering the effects of the national economic slowdown, struggling with their own rising number of foreclosed houses just like other foreclosure-hit counties.

The decision of Bank of America, one of the nation’s largest mortgage banks, to add a liability clause to its short-sale contract could push more foreclose homes for sale into the market.

BofA expanded its short-sale contract and added a clause that would make homeowners liable for the difference between the short-sale price and the mortgage loan amount.

Housing advocates were dismayed by the clause, contending that the clause will push more homeowners into bankruptcy or foreclosure, perpetuating the growth of foreclosed homes for sale.

Since BofA is among the nation’s biggest mortgage lenders and also the owner of another of the nation’s biggest lenders, Countrywide Financial, its decision to revise its short-sale agreement will affect large numbers of borrowers.

This decision could force homeowners considering the short-sale option to change their minds and just allow their houses to become foreclosed homes for sale.

In response to criticisms, BofA explained that it was just asking homeowners to sign a promissory note to protect its shareholders and investors who will suffer large losses from the gaps between short sale prices and loan amounts.

The bank also insisted that other mortgage insurance firms and investors have been requiring the promissory-note part of the short-sale agreement.

Recently, the Obama administration encouraged troubled homeowners to consider short selling to prevent their houses from becoming foreclosed homes for sale if they are not qualified under the loan refinancing and modification schemes of the Making Home Affordable program.

Officials promoted the short-sale option because it protects the credit records of defaulting homeowners, giving them another chance to make a home purchase when their financial circumstances become better.

But the liability to pay the difference, as described in the Bank of America short sale contract, is now another barrier to overcome for many homeowners.

In the state of Washington, short selling has been a favored foreclosure prevention option. Of the total single-family houses sold in Washington recently, 4,400 units were short sales, representing around 12 percent of total statewide sales.

The short-sale number could be even bigger, according to real estate analysts in the state, because some short-sales were not listed as such in some records.

The BofA decision has alarmed mortgage professionals in Washington who have been working out short sales. They said about one-third of sales they are currently working out are short sales.

Lastly, spokespersons for BofA and other mortgage banks argue that the short-sale clause could encourage many homeowners to exert more effort to get loan refinancing or loan modification to prevent their houses from becoming foreclosed homes for sale.

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Florida lawyers working for homeowners facing foreclosures have been advising their clients to remain in their houses while the foreclosure process is carried out.

The lawyers explained that there are several benefits of remaining in the homes and not walking away immediately. The lawyers said that the lenders could be forced to modify the loans to affordable payment schemes or the banks could remedy a short sale, preventing borrowers from struggling through life with a foreclosure record.

Also, the lawyers said, the decision to stay put can also help the mortgage lenders. While homeowners stay in the homes, the properties are maintained and prevented from being vandalized. If homes are taken care of, neighborhoods are protected from blight.

The lawyers also explained that homeowners whose houses will ultimately become foreclosed can save while waiting for the final eviction notice. As their credit scores are already ruined by foreclosures, they need money to find a place where they can stay.

Some lawyers in Florida have found that some banks do not carry out foreclosures immediately because of several reasons: lack of personnel, inadequate systems, backlog on court foreclosure filings, large number of loan modification applications and rising number of foreclosed properties in the market.

The lawyers also said that homeowners who file actions against foreclosures are also able to buy time and stay in the homes while the legal process goes through the system. Foreclosure filings without homeowner complaints go through the fast-track court process while foreclosure filings with complaints go to the traditional route.

In Florida, courts have established processes that expedite the system to clear thousands of foreclosure filings. In the counties of Manatee and Sarasota alone, over 46,000 filings have been submitted.

Another tactic that homeowners can do, according to Florida foreclosure defense lawyers, is the filing of action to require lenders to prove that they are the real owners of the mortgages.

Large numbers of mortgage loans during the housing boom were repackaged and sold as mortgage-backed securities to various investors, putting a question on the ownership of the mortgage loans.

Additionally, lawyers hired by mortgage lenders to file foreclosures often pay the lawyers for every foreclosure accomplished, so the lawyers focus on the easiest foreclosure cases first, giving some more time to homeowners who file valid complaints and inquiries either with the courts or with the lenders.

Lastly, the lawyers reiterated that these tactics are legal ways to help homeowners buy time to save some money and help them survive the effects of foreclosures.

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In all previous recessions, sales of new homes, foreclosures homes and other existing homes jumped up and down by roughly the same proportion, according to housing economists.

But in this current recession, sales of new homes have fallen far more significantly than sales of foreclosures homes and other existing homes.

The result, according to economists, is that new homes are staying unsold in the housing market for nearly one year.

The difference in trend can also be observed in the prices. Across the U.S. and particularly in the New York regional market, sales prices for existing homes have fallen more steeply than sales prices for new homes.

This price difference, according to housing analysts, has driven the faster pace of sales of previously owned homes compared to new homes.

Based on real estate market data, out of 135,000 unsold new homes in May, almost 50 percent have been waiting in the market for one year or more as of May 31. The median length of time these unsold new homes have spent waiting on the market has reached 11.5 months, which is a first in the history of U.S. residential sales.

Some analysts contend that home builders may need to lower their prices even further down to be able to compete with low-priced existing homes. Builders, some analysts said, should have realized by now the folly of their overbuilding and speculative ventures.

Meanwhile, some housing economists contend that it is advantageous to the housing market that the sales of foreclosures homes and other previously owned homes have been overtaking new homes by a wide gap.

Many economists state that the overwhelmingly large numbers of foreclosures homes need to be cut down to a more manageable level before a housing recovery can start and before a nationwide recovery can begin.

Although housing analysts are encouraged by the rising pace of sales of foreclosures homes and other existing homes, they are now concerned about the predicted wave of foreclosures arising from the readjustment of option adjustable mortgage loans later this year and in the following years.

Aside from the option ARM problem, the country is also clobbered by rising business closures and job losses, which are now the main reasons for most of the recent foreclosures.

Lastly, economists contend that foreclosures homes and other pre-owned homes have been able to adapt to changes in housing market conditions more quickly than new homes.

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Prospective home buyers looking at Phoenix as a retirement or investment area or as a base for their families should make their purchases now from Phoenix’s foreclosed home list inventories, according to analysts of residential real estate sales in Phoenix.

The analysts found that the average foreclosed home list prices and non-foreclosure list prices in Phoenix reached their lowest level in the first week of April – $155,789 – and in the last week of the same month – $155,900. They compared home sales prices in Phoenix from March this year through May.

The $155,789 average home price was the lowest level reached in Phoenix in seven years. Since April, foreclosed home list prices and non-foreclosure list prices in the city reversed their downward direction and slowly crept up to reach the current average price level of $169,668.

To support the contention of the analysts that the time to buy foreclosed home list properties is now, they also analyzed median home sales prices in the city during the same months.

The median home price is the price level where half of total sales were priced above and half of total sales were priced below.

The lowest median sales price in Phoenix was $115,500, a sales price recorded in the middle of May. It has been the lowest median since 2002 and was lower than the current $124,000 median home price.

According to another report, the percentage of foreclosed home list properties in the city’s housing market has gone down from 28 percent to 14 percent of available residential listings. This information should encourage prospective home buyers to make their home purchases now before foreclosed home list inventories get lighter or else they would have to wait for the next foreclosure batch.

In contrast, the percentage of short sales has increased from 22 percent to 33 percent while the sales percentage for non-foreclosure properties remained largely the same.

Meanwhile, the higher-priced sector of the Phoenix market is still in its slow pace. Only 12.3 percent of houses priced at $400,000 and higher are scheduled to be purchased while 42 percent of houses priced lower than $400,000 have pending purchase contracts.

Based on the residential sales study, home buying activities in Phoenix in the first 6 months of this year are at record levels since the boom years of 2004 and 2005. Currently, there are more than 13,000 pending contracts to buy foreclosed home list properties and non-foreclosure units, with about 4,000 more being negotiated.

The prices of foreclosed houses for sale and non-foreclosure homes dropped in Las Vegas and in California in May, compared to prices in May 2008, based on real estate price studies in California and Nevada.

Due to large inventories of foreclosed houses for sale, the median sales price for a previously owned single-family house in California dropped to $267,570, a decrease of 30 percent from the median in May 2008. In Las Vegas, the median sales price for condo units and single-family houses decreased to $135,000, a drop of 44 percent compared to the median in May 2008.

Foreclosed houses for sale accounted for a staggering 73 percent of total sales of pre-owned homes and condos in the area covered by Las Vegas and Paradise in May. In California, 51 percent of all pre-owned home sales were foreclosed houses for sale.

Real estate analysts say that California and other states in the West will suffer more foreclosures in the coming months and years, as the unemployment problem worsens and as adjustable rate mortgage loans readjust to higher rates.

Sales of foreclosed houses for sale and non-foreclosed pre-owned homes in California in May reached an adjusted yearly rate of 556,590 units, a 35.2 percent increase from the 411,770 adjusted yearly rate in May 2008 and nearly 3 percent increase from the April adjusted yearly rate.

In California, it would take 53.5 days to sell a house in May based on median computations, representing an increase from the 49.2 median in May 2008. Using the May sales pace, it would take 4.2 months to deplete California’s inventory, a decrease from the 8.7-month estimate in May 2008.

The median sales price for a condo unit in California dropped in May to $236,660, a decrease of 34 percent from the median in May 2008. The number of condo units sold increased by 35 percent compared to May 2008 sales and increased by 5.2 percent compared to April sales.

Meanwhile in Las Vegas, the median home price decreased for 25 straight months using year-over-year comparison. In May, the metro area’s median home price of $135,000 was 57 percent lower than the record $312,000 reached in November 2006.

Because California and Nevada were on top of the charts of foreclosure filings in May and many borrowers in these states took out ARMs, prices of foreclosed houses for sale and non-foreclosure houses in these states are expected to fall further.

Three-decker homes have long been regional emblems in New England. They are fixtures in the landscapes of various New England cities, including Boston and Worcester in Massachusetts and Providence in Rhode Island.

But now, as the foreclosure crisis continues on its path of destruction, a growing number of three-decker homes are found on REO property listings, with many of them foreclosed and abandoned to decay and demolish.

It used to be that three-decker homes are a symbol of affordable and spacious living option. They dotted the landscape of Boston and visitors to the city usually have the first glimpse of these properties when landing at the Logan International Airport.

They have been featured in several movies, including “Mystic River.” For several years, three-decker homes were acquired by out-of-state investors to be rented but never maintained.

Warren Group Chief Executive Officer Timothy M. Warren Jr. said that three-decker homes represented a business opportunity to some people. They are usually owned by absentee landlords who took the risk and are prepared to walk away if everything does not work out.

Data from Boston’s Department of Neighborhood Development showed that three-decker homes accounted for 21 percent of REO property listings and 14 percent of property stocks last year.

In Lynn, Massachusetts, three-decker homes accounted for 9 percent of the property stocks and 22 percent of repossessed properties. In New Bedford, 32 percent of three-decker homes are on REO property listings and they make up nearly 16 percent of the property stock.

Meanwhile, the price of triple-decker homes fell way below than that of condominiums and single-family houses. In East Boston, triple-deckers that were sold for $540,000 during the market boom in 2004 are now selling for $300,000. Some REO property listings have triple-deckers that sold for as low as $150,000.

Industry experts believed that the blight caused by abandoned and vacant triple-deckers could change the landscape of some neighborhoods and communities severely affected by the foreclosure crisis.

Repossessed triple-decker homes have become favorite targets of vandals, squatters and thieves, with some setting fire on these properties to expose and steal copper pipes inside walls. In Worcester, about 60 percent of bank-owned triple-deckers have multiple code violations.

In New Bedford, Mayor Scott W. Lang has decided to demolish seven dilapidated three-deckers that are on REO property listings and owed by absentee landlords.

He believes that it would not long before more three-deckers would be razed to the ground.