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How much will foreclosures rise this year? A lot.

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Sales of foreclosed homes are expected to rise to 1.25 million in 2012 — a 25 percent increase from last year, according to new data from Moody’s Analytics first reported by Bloomberg. As a result, home prices in the 20 biggest U.S. metro areas are expected to drop by 2.9 percent this year, according to Celia Chen, a housing economist at Moody’s Analytics, citing the Case-Shiller/S&P Home Price Index. Carlos Barria Reuters

The drop comes because the market will be working through the backlog of homes that had been held up before the mortgage fraud settlement was finalized in February. But the sudden glut poses risks for the economy, Chen says. “As long as home prices are falling, the economy is at risk of falling into another recession, because people are going to be nervous about buying homes.” That said, the economy — along with other parts of the housing market — has shown other signs of picking up, so Chen still expects the overall economy to expand in 2012.

The more hopeful scenario is that deep-pocketed investors are becoming interested in buying up distressed homes in bulk, and they could see this sudden rush of foreclosures as an opportunity to make some big deals.

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