Big drop in home prices predicted

NEW YORK (CNNMoney.com) -- Most industry watchers agree that home prices will continue to slide before they recover, but now some economists say they've got a long way to fall before bouncing back.

David Wyss, chief economist at Standard & Poors, has forecast a price drop of about 8 percent for the 24-month period through the fourth quarter of 2008.

His prediction came during a general economic outlook session at the Mortgage Bankers Association's (MBA) National Secondary Market Conference & Expo in New York this week.

Housing prices will suffer from a "significant increase in defaults and foreclosures," he said, with affordability still a major issue. Wyss worried how hard the slump will hit already highly inflated housing markets.

He said its impact on areas like South Florida, where much of the buying is speculative investment in second homes, could be big. "You don't need a second home," Wyss said.

Overall, he said he expects the U.S. economy to slow this year to a growth rate of about 2.25 percent, down from 3.3 percent last year.

Celia Chen, Moody's Economy.com's director of housing economics followed Wyss' lead. "We also have an 8 percent decline in median house prices [for the 24-month period ending March 31, 2008], which is consistent with what David Wyss had."

"That is quite a bold forecast," Lawrence Yun, economist at the National Association of Realtors, speaking from his Washington, D.C. office, said of Wyss's prediction. NAR is predicting a much less severe total decline of 1.4 percent through the slump - prices have already declined three straight quarters - and that a recovery will start to take place in early 2008.

"The run up," Yun said, "was an investor-demand driven boom, and it was followed by an investor-driven collapse."

He noted that speculative investors in a rising market drove up prices and are now taking profits or unloading slowly appreciating properties. Buying as an investment fell by 29 percent in 2006, according to NAR stats. That slide, which began in 2006, will last through the end of this year, Yun said.

"Now with the investor-purchase cycle out of the way, traditional factors will drive sales," Yun said, including economic growth, job creation and population growth, as well as a demographic sweet spot: Boomers are reaching both peak earning years and the time of life when they start to buy second homes.

Yun said sales volume will revive even sooner than prices, starting this summer. But sellers will have to work through a large inventory of unsold homes before prices start to appreciate again.

Doug Duncan, chief economist for the MBA, also forecast a shallower trough than Wyss did. Speaking at the same MBA conference session, he predicted a drop of 2.7 percent for the year, although he conceded that the number may be less precise than it appears.

"Economists," he said, "demonstrate their senses of humor by employing a decimal point."

He did, however, point out that taking inflation into account, the loss of median home value will approach 5 percent.

Duncan's analysis includes a number of supply-side wildcards - some of which could send prices even lower: cancelled sales are not immediately counted, foreclosures are spiking and owner/occupied vacant homes are at a record high.

He concluded that home-supply may be higher than official statistics indicate and that many sellers may be very motivated, increasing their willingness to sell sell lower.

On the investment side, a look at the real estate derivatives market in the form of the S&P/Case Shiller index and futures appears to offer some support for Wyss. An average of the 10 housing markets listed showed a drop of 1.7 percent in the index from March, 2006 through February, 2007.

Futures trading is indicating a steeper decline: 3.9 percent for the 12 months through February, 2008, for a total of about 5.6 percent - not quite Wyss' or Chen's 8 percent but considerably higher than the MBA and NAR.

But many industry experts put little faith in the futures stats produced by trading in the Shiller derivatives. They believe they're too-thinly traded to represent the sentiment of the entire market and that traders aren't objective enough.