Zandi: 20 Percent Drop in Home Prices Likely, as Recession is a Reality

In a significantly more bearish turn, Moody’s Economy.com chief economist Mark Zandi said Wednesday that a U.S. recession will lead to a 20 percent peak-to-trough drop in home prices, according to coverage provided by Reuters. Zandi had previously forecast a drop of 13 percent last December.

In remarks at a Reuters-sponsored housing summit in New York, Zandi said he now suspects the U.S. is already experiencing the start of a recession:

He expects home sales to hit bottom this spring, housing starts to reach a nadir this summer, and house prices to trough in the spring of 2009.

“Three months ago, I expected the economy to skirt a recession. Now, I expect it to suffer a recession (in the) first half of 2008,” he said.

“To be more precise, the economy is contracting. It’s been contracting for December, January and probably February,” he said. “Another three, four, five months of contraction and that would be a recession.”

Zandi’s largest concern? Foreclosures. “They are also having a measurable impact on spending, particularly areas of the country where foreclosure problems are more serious,” he was quoted by Reuters as saying.

But residential real estate won’t be the only impact of what Zandi sees as a now-burgeoning recession — commercial real estate prices will fall 5 to 10 percent as well, he said.

Via Reuters:

“Prices in the commercial market were overvalued,” he said. Price drops will be “not 20 percent (as in U.S. house prices), but I’d say 5 percent to 10 percent.”

While commercial real estate weakness will fall short of that in residential properties, credit problems will worsen since underwriters loosened standards in 2006 and 2007, he said. Fundamentals in commercial real estate, such as vacancy rates, are still relatively strong and may not show significant weakness until 2009, he said.

Zandi’s remarks — somewhat surprisingly — seemed to jibe with the tack taken by famously-bearish economist Nouriel Roubini, who also spoke at the housing summit and warned that 10 to 15 million homeowers could find themselves underwater in 2008 and would present a growing risk of abandoning properties that are worth less their outstanding mortgages.