Home Prices

Price Declines Expected in 2010 Thanks for Distressed Sales

Posted on Thursday, May 20, 2010

We expect that house prices will continue to decline because the pipeline of distressed mortgages is substantial and because the price discounts for distress sales weaken all house prices,” the forecasting and credit risk unit of Moody’s Analytics wrote.

While the overall housing market has largely bottomed, Moody’s Economy.com says home prices aren’t there just yet. The company projects home sales and new construction to rise slowly this year, but “[n]onetheless, we foresee a 5 percent additional house price decline nationally. Regions with increasing foreclosure volumes will suffer more,” Moody’s said in its report.

During the course of this housing correction, home price trends have been closely tied to distressed transactions, including foreclosure sales and short sales.

The greater the number of foreclosures in a market relative to total home sales, the greater the downward pressure on prices, Moody’s says. The agency points specifically to home price declines as measured by the Case-Shiller national house price index, which deepened drastically in 2008 and early 2009, when the share of foreclosures increased the most.
Banks discount the price of foreclosed properties in order to dispose of them quickly, and Moody’s says the typical markdown has doubled since the beginning of the housing bust. Looking at average home price data from First American CoreLogic, Moody’s says the discount for foreclosed homes is now close to 40 percent of a “normal” existing home price.

The report noted that short sales have a more muted impact on the downward pace of home prices since the discount is far smaller than price cuts associated with a foreclosure sale.

In 2009, Moody’s says price reductions for short sales averaged only 5 percent. Servicers appeared to be more willing to pursue a short sale and lower the price further as the year progressed, Moody’s said, with the average short sale discount increasing by year-end to nearly 12 percent.

While the industry has seen a notable increase in short sales recently, Moody’s says the volume is not sufficient enough to temper the impact of foreclosure sales and curb further price declines.

The administration’s Home Affordable Foreclosure Alternatives (HAFA) program is expected to drive up the number of short sales this year as compared to last year, but Moody’s analysts project that the vast majority – at least 80 percent – of distress sales will continue to be value-draining foreclosure sales.

“To the extent that foreclosures [are taking] longer than expected, our house price outlook may be overly negative,” Moody’s wrote in its report. “A lengthier foreclosure process would keep discounted properties off the market for a longer period of time. In this case, house prices would likely tread sideways through to the next 18 months rather than decline, but in such a scenario prices would miss the rebound that we currently expect in 2012.” - DSNews

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