Last year Mark Zandi, chief economist of the financial research firm Moody's Economy.com, argued that widespread foreclosures would severely punish the U.S. economy if policymakers didn't bail out struggling homeowners.

Zandi said foreclosures would "undermine the already fragile housing market, unsettle the global financial system and push the U.S. into recession."

Now it's arguably happened. And Zandi says the massive inventory of repossessed homes flooding the real estate market and pushing down home prices won't even peak before the end of 2009.

We can see that happening in the Sacramento area. Figures released Wednesday by industry tracker DataQuick Information Services show that sales of homes now owned by banks are playing a big role in the recent sales bump here. Meanwhile, the number of homes that banks are repossessing continues to steadily climb.

In a cell phone conversation from the road, Zandi discussed what's next for a turbulent real estate market.

Q: The end of 2009? Will it really take that long for bank-owned inventory to peak?

A: Given the continuing surge in foreclosure starts, and the fact that the average amount of time a loan remains in the foreclosure process is about a year – and then that it takes about six months to be sold – that would strongly argue it will not be before the end of 2009 that the inventory of (bank-owned houses) peaks.

It all depends on how aggressive banks are in selling their REOs (real estate owned, a term for repos, or real estate owned by lender). They have gotten more aggressive. If they continue to sell at price discounts, they may be able to work off that inventory more quickly.

Q: Repo deals in Sacramento brought the region's first year-over-year sales gains in three years in April. Some say that's a sign that Sacramento is ahead of other metros in reaching bottom.

A: I think there's reason to take consolation in the fact that banks are getting aggressive and there are buyers out there at a price. I think that's encouraging.

It's happening in a place like Sacramento first because there's so much inventory, and because foreclosures are still rising and banks are realizing they aren't going to get a better price a year from now. The best price they are going to get is right now.

Q: Some wonder if the sales rush will last. Is it a flash in the pan? As fast as banks sell their repos, they list more. Are there enough buyers for them all?

A: It's interesting. California does seem to be ahead. Not just Sacramento, but the entire state, in terms of buyers coming into the market. It's interesting that sales are picking up in the last three or four months in California. That hasn't happened elsewhere. There are REOs in Florida and Nevada and Arizona. But you haven't seen buyers step up. That may go to the underlying fundamentals of California. In the long run, people feel that it will be a better investment.

Q: Foreclosures here keep rising. What's that mean for values?

A: It means prices will remain under a lot of pressure. People stepping in now, they should go in with the idea that their home may be worth less in 12 months. They should have a long enough horizon, three, five or seven years. If they have a short-term horizon, they will be disappointed because I think prices will continue to fall. If you have more inventory of anything it will weigh on the price of that thing and housing is no different.

Q: Have efforts like Hope Now by the mortgage industry and Bush administration, aimed at working with troubled homeowners, helped slow the number of foreclosures?

A: Hope Now is helpful, but it's being overwhelmed. About half a million loans have been modified and another 600,000 have been put on repayment plans. That helps, but it's being completely swamped by the surge of foreclosures we are experiencing.

Hope Now was a solution for last year's problem of adjustable-rate mortgages resetting. That's not the problem this year. It's negative equity and a weak job market. Hope Now isn't really going to be much help addressing current issues.

Q: There is talk now about other loans that may go bad after the subprime problem eases later this year.

A: This problem is not going away. It may get less severe, but this problem is going to be with us into the next decade. Those 2005 Alt-A loans (a loan variety not as risky as subprime, but more risky than typical prime loans) are all under water (the borrower owes more than the home is worth).

Foreclosures will be lower in 2010 than now, but they're going to stay high for some time.

That's another reason if you're buying a home in Sacramento you should have a long horizon. If you have two years (and then plan to sell), chances are you're being overly optimistic. If it's five to 10 years you will be OK."