Fitch Sees No Bottom Until Late Next Year

• Tweet

Fitch Ratings' outlook for U.S. residential real estate prices has improved slightly in recent months, but the authoritative ratings service still sees no bottom to declining housing prices until late 2013.

Fitch expects prices to decline by another 7.8 percent until the bottom of national average sold prices is finally reached. The prediction represents an in improvement from last quarter's forecast of an additional 9.1 percent decline in prices. With annual inflation running close to 3 percent annually and an economic recovery taking hold, Fitch expects home prices to touch bottom in late 2013 and then begin a slow recovery. Underemployment, tight lending practices, and the large delinquent inventory of homes remain the biggest risks to all of these trends.

The slow and steady recovery in the economy and some increasingly positive indicators caused the upward revision. Currently, Fitch analysts believe that 12 states are undervalued and 14 have prices in a sustainable range. For instance, the drastic declines of the last few years in Arizona appear to be over. However, some drops remain likely. Prices are beginning to fall in New York and New Jersey, which have performed better than most due to a large backlog of foreclosure inventory, which has begun to liquidate.

On the local level, recovery is expected to vary. One of the worst performing states in the crisis has been Georgia. Prices statewide are currently 32 percent below their 2000 levels. Those losses are second only to Michigan's. But a closer look at Atlanta exemplifies the local nature of the crisis and recovery. Prices in the central portion of the city and its affluent northern suburb have largely held ground, while the southern portion of the city's prices collapsed.

To reverse the free fall in prices across South, true demand will need to return in these areas. REO-to-rental programs targeting the neighborhoods that have seen the largest declines could help eliminate the negative externalities of vacant homes, improve the quality of the housing stock, and, ideally, revive these neighborhoods, Fitch said.

Investors are increasingly adopting REO-to-rental strategies. Since the beginning of the year, various small- to mid-sized private equity firms have bought homes in tight geographic areas with the intention of renting them. Earlier this month, a home builder and one of the largest private equity firms agreed to form a REIT that will exclusively buy and rent single-family homes. In the securitization market, others have also built and offered distressed residential mortgage-backed funds. Notably, large firms have recently begun allocating capital to distressed mortgage bonds.