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Analysts Don’t Foresee Rise in Home Prices Until 2014

Markets across the country are in full-fledged correction mode. That combined with the prevalence of foreclosures has analysts at the research firm ""Capital Economics"":http://www.capitaleconomics.com convinced that the double dip in home prices will continue throughout this year.
[IMAGE] In fact, they say the structural factors that are constraining demand, such as higher down payment requirements, probably mean that prices won't rise consistently until 2014.

""We expect the influence of more forced foreclosed sales to drag house prices down by a further 3 percent this year, resulting in a 5 percent fall in the year as a whole,"" the firm's researchers said in a market report released Monday.

Paul Dales, senior U.S. economist with Capital Economics, says an easing in the flow of foreclosed homes may allow prices to fall at a more moderate pace and even stabilize next year at a level 35 percent below the 2006 peak.

However, he notes that while prices tend to rise rapidly in the years after downturns, this time a ""chronic lack of demand"" means that home prices will probably be unchanged in both 2012 and 2013.

Dales says home sales will remain at unusually low levels, largely due to the dynamic of demand being constrained by lenders asking for a higher down payment at a time when more households can't afford it.

He says the proposed risk retention rules, which will result in more lenders requiring a 20 percent down payment, will lock more first-time buyers out of the market.

Add to that the fact that half of all repeat buyers won't be able to use their home equity to raise a 20 percent down payment, Dales explained, since a quarter of them are in negative equity and another quarter have less than 20 percent positive equity, and it doesn't matter how attractive or affordable housing is with today's low prices and low rates.

On top of that, he underscores that over the next few years up to three million foreclosed homes may come onto the


market, adding to the current excess housing inventory of around two million homes and keeping supply higher than demand, further depressing property values.

And herein lies the danger that the further fall in prices will send more homeowners into negative equity, which then leads to more defaults and more forced foreclosed sales, Dales said.

According to Capital Economics, the company's forecast that the unemployment rate will continue to edge lower over the next few years suggests that the share of households behind on their mortgage payments will continue to fall.

The firm's analysts say it is ""encouraging"" that in the first quarter the share of households in foreclosure and those entering foreclosure both declined.

However, they note that 4.5 million households are still in serious danger of losing their homes as they have missed at least three mortgage payments or are already in the foreclosure process. According to Capital Economics, that's about 3.5 million more than normal.

Most of these mortgages will never become current again, the firm's researchers contend, and they'll provide a steady supply of distressed properties to the marketplace.

What's more is that lenders are already sitting on an inventory of homes that have been foreclosed but not yet put up for sale, according to Capital Economics. The firm cites data showing that in the first quarter, Fannie Mae and Freddie Mac were guilty holding back homes to the tune of 220,000 properties.

The analysts suggest that there are around two million more homes empty than normal. Add this to the homes currently in the foreclosure pipeline and there may still be a ""shadow inventory"" of up to five million homes, according to Capital Economics' calculations.

At some point, the report stressed, these homes will come into the light and add to the observable inventory, further increasing supply and depressing property values.

In an upside scenario in which the recent slowdown in economic activity proves to be temporary and private sector growth rebounds, which in turn boosts housing demand and results in fewer foreclosures, Capital Economics says prices may fall from current levels by just 1 percent before starting to rise at a healthy clip next year.

In a downside scenario, though, the firm's analysts warn they could fall by a further 20 percent over the next two-and-a-half years, if unemployment and mortgage rates rise to dampen demand, and the resulting decline in home prices sends more households into
negative equity and leads to increased defaults.

About Author: Carrie Bay

Carrie Bay is a freelance writer for DS News and its sister publication MReport. She served as online editor for DSNews.com from 2008 through 2011. Prior to joining DS News and the Five Star organization, she managed public relations, marketing, and media relations initiatives for several B2B companies in the financial services, technology, and telecommunications industries. She also wrote for retail and nonprofit organizations upon graduating from Texas A&M University with degrees in journalism and English.

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