Slightly Improved Housing Outlook May Delay Foreclosures but Prolong Price Decline

Moody’s has raised its house price outlook slightly but still does not expect much benefit from loan modification programs.

Excerpts fromMoody’s ResiLandscape (Premium)

We’ve shaded our house price forecasts slightly higher in the last month because we’ve considered the recent house price data and uncertainties surrounding foreclosures and the timing that foreclosure sales will hit the market. Although the basic contours of the outlook remain the same, it is looking likely that foreclosures will hit the market more slowly than we had anticipated, mitigating but prolonging the price decline.

Prices will decline an additional 8% from the fourth quarter of last year to the bottom in the fourth quarter of this year, for a peak-to-trough drop of 34%. Last month, we had expected a total peak-to-trough decline of 37%, with a bottom in the third quarter.

House prices rose in the second and third quarters of last year, according to the Case-Shiller U.S. house price index, rising by an annualized 7% in each quarter. Fourth quarter is also shaping up to be a positive growth quarter, with the Case-Shiller 20-city index suggesting another quarter-to-quarter gain at the end of last year. A similar improvement is evident in other commonly cited measures of house prices, such as the National Association of Realtors’ median existing house price and the FHFA’s repeat purchase house price index.

As has been discussed before in Resi Landscape, we believe that the recent improvement in house prices is a temporary reprieve. A decline in distress sales—including foreclosure, deed in lieu, and short sales—as a share of total home sales is a driving contributor to the gain in house prices. The decline in the share of distress sales was particularly notable at the end of last year when the first-time homebuyer tax credit helped the total number of homes sold soar on an annualized basis to 6.4 million units, the strongest pace in more than two years. Concurrently, the HAMP program as well as other servicer-initiated mortgage modification programs, have kept hundreds of thousands homes out of foreclosure and off the market—for now.

Thus far, the HAMP program has successfully modified only a small number of the troubled loans. The assumption that the program’s success will remain underwhelming underpins our unchanged expectations that house prices will further decline. Many of the loans in the program will fail to convert to a permanent modification and will eventually end up on the market as heavily discounted distress sales.