U.S. Home Prices Face 3-Year Drop as Inventory Surge Looms

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The slide in U.S. home prices may have another three years to go as sellers add as many as 12 million more properties to the market.

Shadow inventory -- the supply of homes in default or foreclosure that may be offered for sale -- is preventing prices from bottoming after a 28 percent plunge from 2006, according to analysts from Moody’s Analytics Inc., Fannie Mae, Morgan Stanley and Barclays Plc. Those properties are in addition to houses that are vacant or that may soon be put on the market by owners.

“Whether it’s the sidelined, shadow or current inventory, the issue is there’s more supply than demand,” said Oliver Chang, a U.S. housing strategist with Morgan Stanley in San Francisco. “Once you reach a bottom, it will take three or four years for prices to begin to rise 1 or 2 percent a year.”

Rising supply threatens to undermine government efforts to boost the housing market as homebuyers wait for better deals. Further price declines are necessary for a sustainable rebound as a stimulus-driven recovery falters, said Joshua Shapiro, chief U.S. economist of Maria Fiorini Ramirez Inc., a New York economic forecasting firm.

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"The best thing that could happen is for prices to get to a level that clears the market," said Shapiro, who predicts prices may fall another 10 percent to 15 percent.

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Prices dropped in 36 states in July from a year earlier, CoreLogic Inc., a Santa Ana, California-based real estate and financial information company, reported today. Its housing index showed the biggest declines in Idaho, Alabama and Utah. Maine, South Dakota and California had the largest gains.

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Sandipan Deb, a residential credit strategist for Barclays in New York, said prices will drop another 8 percent -- to 2002 levels -- before beginning a recovery in 2014.

"On a national level, you have never seen a decline of this sort," Deb said in a telephone interview. "I would caveat that by saying you also have not seen an increase on a national level like we saw from 2002 or 2003 to 2006."

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If the market doesn’t fall to its natural bottom, price gains in the next five to 10 years won’t keep pace with inflation as the difference is made up "on the backend," said Barry Ritholtz, chief executive officer of FusionIQ, a New York research company. Price increases that fail to at least match inflation are the same as reductions in value, Ritholtz said.

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Owners of about 11 million homes, or 23 percent of households with a mortgage, owed more than their property was worth as of June 30, according to CoreLogic. Another 2.4 million borrowers had less than 5 percent equity in their houses and probably would lose money on a sale after paying broker fees and closing costs, CoreLogic said Aug 25.

In Nevada, 68 percent of homes were underwater in July, with mortgage loans statewide totaling 120 percent of home values, according to CoreLogic. Only 7.1 percent of properties in New York state were underwater, with the total loan-to-value equivalent of 50 percent, the company said.

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Detroit, Las Vegas and Fort Myers, Florida, will take until at least 2020 to return homeowners to positive equity, CoreLogic said in a March report that compared prices in 10 metro areas. Atlanta, Dallas and California’s Riverside and San Bernardino counties will need until 2016. The Washington, D.C., area will take the least amount of time, with negative equity disappearing around 2015, CoreLogic said.

http://www.bloomberg.com/news/2010-09-15/u-s-home-prices-face-three-year-drop-as-inventory-surge-looms.html

[mawilson 2,133]

The slide in U.S. home prices may have another three years to go as sellers add as many as 12 million more properties to the market.

The slide will continue for as long as the government keeps trying to prop up the market with artificial stimuli.

"When buyers don't fall for prices, prices must fall for buyers."