Home Prices Will Fall Five More Years

Home prices will continue to fall over the next five years, though the greatest declines have already occurred this year and property value reductions will gradually decrease until 2014, according to a national price forecast released Tuesday at a conference on Challenges in Residential and Commercial MBS hosted by Fitch Ratings.

Comparing the current crisis to the recession of the early 90s, Dennis Capozza of University Financial Associates released said that housing prices will again trail the overall economic recovery. However, the severity of today's situation will drive prices lower and lengthen the time it will take housing prices to begin to appreciate, compared to the recession eighteen years ago.

Home price appreciation didn't turn negative until the second quarter of 2007, but once they started to fall, the slope was steep. In the third quarter of 2008 they fell nearly ten percent.

Prices will fall 4.5 percent in real terms next year and the year after, and under four percent in 2012. They will fall 3¼ percent in 2013 and less than 3 percent in 2014. Some metros will stabilize before then. Appreciation will be lowest on the coasts and the Midwestern states and highest in the Plains states and the Ohio Valley.

Local economic conditions, especially excess supply, rather than underwriting or moral hazard, are the primary causes of falling prices. Unemployment today is greater than the recession in the early 90s, driving borrowers who are already underwater into default and impacting on the economy negatively. Though foreclosures are peaking now, a four and a half month excess supply is creating a huge overhang, Capozza said.

Though we have not yet reached the bottom of the housing market, Capozza said the economic market for newly originated residential mortgage backed securities is improving. "The worst vintages are behind us," he said.