Home Prices Forecast to Make Slow Progress from Floor Reached in Q1
By: Carrie Bay 10/22/2012
Home prices reached a sustainable bottom during the first quarter of this year, according to Barclays’ U.S. residential credit strategy team. In many markets, longer-term affordability measures point to equilibrium, the firm’s analysts contend.
While the floor appears to have materialized, they stress that home prices are likely to recover slowly over the next 4 to 5 years.
“We expect on average a 3-4 percent annual increase in home prices [nationally] in coming years,” they said in an updated market outlook.
At that rate, Barclays’ analysts explained, home prices will be slightly below their 2006 peaks even in 2020, finally returning to pre-crisis peak levels in June 2021.
Barclays credits government and private modification programs with delaying foreclosures and preventing an overcorrection, allowing the home price floor to form earlier this year by keeping a glut of distressed homes from hitting the market.
The research firm noted that it is seeing significant variation by state in terms of home price appreciation, tied directly to foreclosure processing timelines.
States with the fastest timelines—California (7.0 months), Colorado (7.3 months), Arizona (7.7 months)—are also home to the biggest annual increases in home prices. Data provided in Barclays report illustrates that foreclosure timelines in these states are on average at least 12 months shorter than in states with the slowest procedures—New Jersey (21.3 months), New York (21.0 months), Florida (20.7 months)—where price gains are smaller.
Delayed foreclosures mean distressed inventory will remain elevated, according to Barclays. The firm’s analysts estimate there are currently close to 3.3 million homes seriously delinquent or in foreclosure which will eventually need to be sold as REOs or short sales. Over the next three years, they expect to see around 4 million liquidations.
“We expect 110,000 distressed sales per month for several years, which should keep [the] distressed share [of homes sales] elevated,” the analysts wrote. For each 1 percent lower distressed share, home prices improve 1.1 percent, according to Barclays.
The firm’s analysts noted in their report, however, that shadow inventory is not the same thing as excess supply, and stressed, “[W]e believe that in the longer term, housing is driven by excess supply.” In fact, Barclays’ data show that the industry’s shadow inventory has been declining steadily for more than a year, and the excess supply is manageable over a two- to three-year period.
“What matters is total excess supply, including owner and rental units,” the analysts wrote, adding that foreclosed borrowers still need a housing unit; they’re simply transitioning from owner to rental units. By Barclays’ assessment, excess supply stood at about 2.6 million housing units in June 2012.
“Our estimate for clearing excess supply is 2-3 years; but recent household formation has outpaced completions substantially, which could point to faster absorption of the excess supply,” Barclays’ analysts stated in their report.
With supply and demand aligning more closely, Barclays says long-run measures suggest home prices are close to equilibrium, and that means the risk that home prices landed on a false bottom earlier this year and will fall dramatically from their current levels remains low. “The government will intervene if prices fall further, [and] other factors will keep timelines long,” the research firm noted in its analysis.
Risks that could upset Barclays’ updated outlook for the housing and residential credit markets stem mostly from extra-market shocks, the company’s analysts explained. Such shocks could take the form of the fiscal cliff awaiting U.S. lawmakers at year-end, the reverberating effects of ongoing sovereign debt crises in Europe, and the fate of the mortgage interest deduction, though Barclays notes the risk that comes with capping the deduction is associated primarily with higher-priced homes.
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