Rising home foreclosures in Rhode Island could claim a new casualty — house prices. Of all the ways to sell a house, a foreclosure generally yields the lowest price. Mortgage lenders looking to unload a property seized from borrowers who fell behind on their payments can expect to get back only enough to cover the loan, if that.

In 2005, house sales in Rhode Island outnumbered foreclosure auctions advertised in The Providence Journal by 14 to 1. Now, that ratio has narrowed to less than 3 to 1.

“That’s the possible storm cloud on the horizon,” said Timothy Warren Jr., chief executive officer of The Warren Group, a real-estate and information firm in Boston. “There’s a threat that those distressed properties, whether they sell at auction or are dealt with another way, could have an impact on the market.”

Foreclosure sales may be good news to investors or buyers in search of bargains, but not for neighbors. Even one foreclosure in a neighborhood can drive down property values of nearby houses an estimated 0.9 percent to 1.36 percent, according to one study. On a $255,000 house, that amounts to a decline of $2,300 to $9,200.

The median price of a single-family house in Rhode Island this year has already fallen nearly 3 percent, or $7,000, to $255,000, compared with $262,000 during the first-quarter of last year, according to The Warren Group.

“The steady increases in house prices in some ways covered up the potential of foreclosures in the past,” said Ren Essene, a research analyst at Harvard’s Joint Center for Housing Studies. So when prices level off or decline, people who were already having trouble paying their mortgages suddenly cannot sell or refinance their way out of the problem.

Paul Talkowski, president of Daniel J. Flynn & Co. Inc. of Quincy, Mass., waits for bidders to arrive at the home of Kenneth and Lisa DeVoy at 6 Anawan Ave. in Bristol, before selling the house at a foreclosure auction. When no bidders registered, Talkowski accepted a pre-submitted bid from the bank for $174,583.02.

The Providence Journal / Bill Murphy Bill Murphy

Lenders advertised 678 houses in Rhode Island for foreclosure auction during the first quarter, up 122 percent from the same period last year, according to a Journal analysis of newspaper legal ads.

The pace is on track to exceed last year, when just over 1,850 homes were advertised for foreclosure sale, which was more than twice as many as in 2005.

Nationwide, foreclosures on home loans made to borrowers with blemished credit, known as “subprime” loans, are soaring, and economists warn that could dump more properties on an already supply-heavy market, further depressing prices.

“There’s a lot less credit available for borrowers, and a lot more foreclosed property being sold at a discount,” said Mark Zandi, chief economist for Moody’s Economy.com, a consulting firm in West Chester, Pa. “I think this will put a pall over the spring market.”

Rhode Island is not expected to experience the severity of problems felt in rust-belt states such as Ohio, where a downturn in house prices coupled with factory job losses has left entire subdivisions pockmarked with vacant houses that can’t find buyers. But the Ocean State remains uniquely vulnerable to the subprime-lending industry’s turmoil.

One reason is that Rhode Island had the third-highest share of subprime loans of any state in 2005 after New York and California, according to home-loan data analyzed by Moody’s Economy.com. Subprime loans accounted for 22.5 percent of all Rhode Island home loans originated in 2005, compared with a national average of 18.6 percent. In Massachusetts, the share of subprime loans that year was 19.5 percent.

During the 1990s real-estate crash, Richard August managed the residential portfolio of foreclosed properties for Fleet Bank. Part of his job was to go to foreclosure auctions for houses where the bank’s subsidiary, Fleet Mortgage Corp., was the lender. If the bids were too low, he was to buy the property back.

“Investors are bottom feeders and would come up and they’d be looking for a real killing,” said August, who is retired. “When they saw me driving up they’d say, ‘Oh … , Fleet’s here again!’ They’d know they wouldn’t get a bargain.”

To lenders who got burned in the last real-estate downturn, the latest rise in foreclosures is no surprise.

“When mortgage lenders start offering zero-interest loans and start saying to people you don’t even have to have a down payment — we’ll write a separate loan you can defer for several years… you know this problem is coming,” August said. “It’s absolutely inevitable.”

Mortgage lenders, he said, knew this. “In every group of deals,” August said, “there’s a built-in assumption that some are going to fail.”

In 2005, nearly 11,979 houses were sold in Rhode Island, according to The Warren Group. That year, 829 houses were advertised in The Providence Journal for foreclosure auction. So the ratio of houses sold to foreclosure ads was 14 to 1.

Last year, house sales in the state dipped to 10,358, while foreclosure ads in the Journal climbed to 1,852 — narrowing the ratio to about 6 to 1. Foreclosure impact on the market now is even more acute, with just under 2,000 houses sold in Rhode Island during the first quarter of this year, and 678 advertised for foreclosure — a ratio of 3 to 1.

In previous real-estate downturns, most of the loans were made by banks and government-insured lenders. Now, more than half of all outstanding loans have been packaged into mortgage-backed securities financed by Wall Street investors. So if there is no return on these investments, the money to finance such loans dries up. That means less money available for homeowners to refinance their way out of debt — and less to loan to new buyers.

Fewer buyers and more unsold houses is a recipe for lower prices.

There were 5,639 single-family houses on the market in Rhode Island as of the end of March, the largest number for that time of year since 1997, according to data provided by the statewide Multiple Listing Service to the Rhode Island Association of Realtors.

And that inventory is likely to swell if home foreclosures continue to rise.

Essene, of Harvard, said that the impact of foreclosures on house prices is “very much a neighborhood effect,” and that foreclosures would have to rise at “much higher rate(s) than single-digit rates — that’s where you’d start to be concerned.”

Even so, the increase in home foreclosures is one reason why Moody’s Economy.com now forecasts that Rhode Island house prices will fall, on average, 3.8 percent this year, and 0.7 percent next year.

“If you go back to 2004 and 2005 to the boom and ask most people what they thought about house prices,” said Zandi, of Economy.com, “they would tell you double-digit [growth] forever…Most homeowners and lenders and realtors are perennially optimistic.”

With computer-assisted reporting by Journal Staff Writer Timothy C. Barmann

larditi@projo.com