Jamie Dimon, CEO of JPMorgan Chase, suggested last week that if the foreclosure verification problem was not fixed within a few weeks, it would probably be mean bad news for everyone.

Now, with stories of evictees breaking into foreclosed homes, and fearful articles in The New York Times suggesting that buyers should steer clear of foreclosures until things are sorted out, it is difficult to imagine the situation will resolve fully within a month.

According to realtytrac data cited in a recent AP article, 24% of nationwide second-quarter sales were foreclosures. In Nevada, it was 56% of sales. In Arizona and California, it was more than 40%, and in Rhode Island, Massachusetts, Florida, and Michigan, foreclosure sales amount to more than a third of total sales.

With some companies either extending closing dates or suspending foreclosure sales outright, and with buyers now increasingly wary of foreclosed properties -- and who will have more difficulty finding title insurance -- home sales should fall significantly in the next month or two.

Do the math, and it's ugly, and not just for real estate professionals.

The math
Being unoccupied can be tough on a house. Pipes develop leaks that go unfixed, leaks turn into mold, critters tear up insulation, and windows break and let the weather in to ruin carpet. Foreclosure properties often need some serious work. According to a Realtytrac survey conducted late last year, more than half of buyers willing to purchase foreclosed homes were willing to pay 20% or more of the purchase price on repairs and remodeling.

According to a separate Realtytrac survey, there were 248,534 properties in the foreclosure category (bank-owned, in default, or scheduled for auction) that were sold in the second quarter. At an average sale price of $176,871, this amounts to roughly $44 billion.

If buyers of foreclosed properties spent 20% of the purchase price on repairs and upgrades, this amounts to around $9 billion dollars of home improvement and repair that could be lost or deferred per quarter at current sales rates.

In their most recent annual report, Lowe's (NYSE: LOW) estimated the size of the home improvement market at roughly $560 billion in product demand and installed labor opportunity. At $9 billion a quarter, adjusted a bit for seasonality, it seems plausible that foreclosures spurred repair and remodeling activity accounts for as much as $35 billion a year of the current home improvement market, or roughly 6% of the total market.

If half or a third of foreclosure sales disappear or are pushed into future quarters, it follows that home improvement sales could see a fall of 2%-3%.

Impact
A 2%-3% sales reduction sure doesn't sound huge, but what would that kind of reduction do to Home Depot (NYSE: HD)? Analyst consensus predicts year-over-year sales growth of 1.8% for the October quarter and 0.8% for the January quarter. Those numbers could wind up negative. Both top line and bottom line will likely have to be adjusted.

Home improvement suppliers may be hit as well. Among other things, building supplier Masco (NYSE: MAS) makes plumbing supplies and fixtures, paints including anti-mold Kilz, and windows. On the second-quarter conference call, management frequently mentioned that a particular area of strength was coming from the repair/remodel end of the business -- plumbing, windows (helped by the tax credit), and paint. I seems likely they could lose some of that momentum.

If it's not good, it's bad.
Putting an exact value on the impact of reduced or delayed foreclosure sales takes a lot of guesswork, and it isn't going to be precise, but you don't need to count raindrops to know you need an umbrella. We know that some portion of total sales at home improvement companies is driven by foreclosure remodeling and repair, and we know that some portion of that is going away, and that those reduced revenues were not priced in a month ago.

Slowing sales aren't good for the shareholders or employees of home improvement-related companies. Worse, it means some of the plumbers, electricians, handymen, and many, many others could face another winter with a little less work.

The newest mess seems pretty devoid of good news. It might mean fines for the banks, and work for the attorneys, but it won't likely have people back in their old houses. In the near term, it will cost jobs and won't do the recovery any favors.

The only bright spot is that at some point in the future, there will be more work to be done. Houses don't fix themselves -- if anything, they get worse. The longer they sit, the more work there will be, either for contractors or bulldozers.

Want to read more about the foreclosure mess? Start here:

Josh Wilburn owns shares of Home Depot (with calls sold against). Home Depot and Lowe's Companies are Motley Fool Inside Value picks. Masco is a Motley Fool Income Investor choice. The Fool owns shares of Lowe's Companies. Try any of our Foolish newsletter services free for 30 days.

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