This would have the effect of flooding the market, hampering the recovery and even sending prices falling again, according to Nobel Prize winning economist Joseph Stiglitz.
He is warning that speculators account for most of the recent rise in property sales. 'We're creating a shadow inventory of homes that will be right back on the market as soon as the economy and the housing market begin to improve,' said Stiglitz, a Columbia University professor of economics. 'We could see a double-dip in the housing recession if that happens.'
Robert Shiller, a professor at Yale University also believes this is not a helpful trend. 'These speculators are preventing the market from crashing now, and when they get out it could fall again,' he said.
US real estate prices and sales may begin to stabilize in 2010, said Stiglitz. A worsening economy and growing speculation will delay the recovery further, he said.
'Assuming we don't overshoot, we could be back at equilibrium in 12 to 18 months, but there are reasons to believe we might overshoot,' he cautioned.
The sheer number of foreclosure sales is attracting speculators. There were an average 3,100 foreclosures per day in the US in November, according to RealtyTrac Inc, the real estate data company.
Speculators track notices of default and negotiate directly with banks if a home doesn't sell at auction. Dario Moscoso bought a three-bedroom foreclosed house in San Diego three weeks ago for $490,000, half of what it would have fetched a year ago. He's renting it for $2,500 a month and plans to sell when prices rebound.
But it was this kind of speculative fervour that caused the property price bubble in the first place. Regular buyers are being excluded from the foreclosure market because the rules favour professional property investors, according to Dean Baker, co-director of the Center for Economic and Policy Research.
Baker said he considered buying a Washington home at a foreclosure auction last year until he learned the terms of the sale. Winning bidders had to complete the deal within 30 days, half the time of a standard property purchase, or lose their deposits. It was a risk he didn't want to take.
'This is a place where the government could step in and stop housing's downward spiral by encouraging a more user-friendly process,' he said.
Also foreclosures are usually are sold 'as is' and the properties sometimes aren't available for viewing before bidding, explained Ralph Stewart of Paul E. Saperstein Co. Auctioneers & Appraisers in Holbrook, Massachusetts.
'If you're a first time buyer with a young family, do you really want to buy a home sight unseen and risk losing your down payment?. Investors know how to close a deal quickly and they don't care what it looks like. They're either going to rent it or flip it,' he said.
