House price volatility expected until 2014

by JON PRIOR

A lack of demand may keep house prices from a consistent rise until 2014, according to analysts at Capital Economics.

Home prices double-dipped in the first quarter, according to the Standard & Poor's/Case-Shiller index. While other indices measured some improvement since, analytics firm Altos Research forecasted an up-and-down market for some time. In the near term, Capital Economics said foreclosure sales should keep house prices down 3% in 2011, resulting in another 5% for the year as a whole.

Easing the flow of foreclosures on the market may stabilize prices to 35% below the peak in 2006.

"But while prices tend to rise rapidly in the years after downturns, this time a chronic lack of demand means that they will probably be unchanged in both 2012 and 2013," Capital Economics said.

The analysts said if house prices continue to fall, more borrowers could fall underwater on their mortgage — meaning they owe more on the loan than the home is worth. According to CoreLogic (CLGX: 16.68 -0.12%), there were 11.1 million properties in negative equity as of the end of last year.

"The danger is that the further fall in prices this year will send more homeowners into negative equity, which then leads to more defaults and more forced foreclosed sales," the note from Capital Economics said. "In such a scenario, prices would fall next year too, before possibly stabilizing in 2013."

Economist Robert Shiller, who worked to develop the S&P/Case-Shiller index, recently said there is room for another 10% to 25% drop in home prices.

Capital Economics said for the next five years, the rental market will be the best performing market in U.S. housing. Investors in this area could expect a rental yield of 5.5% this year and up to 6% by 2014. For the mortgage market, however, too much uncertainty remains.

"A meaningful recovery in house prices and owner-occupied demand cannot occur while first-time and repeat buyers are sidelined by rising down payment requirements and widespread negative equity," analysts said.

URL to original article: http://www.housingwire.com/2011/06/20/house-price-volatility-expected-until-2014

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