This sounds right.

Via Wall Street Journal.

The speed at which house prices fall over the next few months could depend less on mortgage rates and Americans’ appetite for home buying than on how banks decide to manage the huge number of foreclosed homes they own or may take from delinquent borrowers in the near future.

Unlike home owners, banks often are much quicker to slash prices to unload properties quickly.

The upshot is that, the more homes being sold by lenders, the faster prices tend to fall. That pattern was clear over the past two years: Price declines that began four years ago accelerated rapidly in 2008 as banks dumped foreclosed properties at fire-sale prices. By January 2009, the share of distressed sales had soared to 45% of all sales nationally; it was even higher in hard-hit markets such as Phoenix, according to analysts at Barclays Capital.

At some point (now?) the banks may have taken “delay and pray” as far as they can and they’ll start foreclosing along a more traditional timeline.

The Home Affordable Modification Program has fallen short of its goals. So far, fewer than 500,000 loans have been modified, below the target of three million to four million. Yet the program served as a “closet moratorium” on foreclosures that stanched the flow of bank-owned homes to the market, said Ronald Temple, portfolio manager at Lazard Asset Management.

The result: The share of distressed sales fell by November to 25% of home sales, and prices stabilized. After rising in the winter, the distressed share fell to 22% in June, before bouncing to 30% in July.

The problem is that these measures are wearing off. Demand plunged this summer after tax credits expired, and unsold homes are piling up. More foreclosures could move onto the market as borrowers fall out of the loan-modification program.

There’s a huge amount of moving the goalposts on the HAMP program. ‘It wasn’t a failure because it delayed foreclosures for a while.’

By those metrics, prices are actually undervalued in markets that have already seen huge declines, such as Las Vegas, Phoenix and Los Angeles.

Phoenix and Las Vegas, yeah. Los Angeles, huh?

Analysts at Barclays Capital estimate that some four million loans are in some stage of foreclosure or are at least 90 days past due, down slightly from a January peak.

Foreclosures may have peaked but at the current rate things are going foreclosures will be high for 2 or 3 more years, at least. That downward pressure on prices could prevent home prices from rising in some areas of metro Phoenix and could lower prices in others areas of metro Phoenix.

While more tax credits aren’t likely, policy makers could still attack the supply problem by, for example, taking foreclosed homes off the market and renting them out.

At this point, the vast majority of the pain has already been felt by Arizona homeowners. The government programs are just more “pretend and extend,” they delay the end game and the eventual rebound.