When the credit crisis began, credit rating agencies created models predicting how bad things may actually get, in terms of how far down home prices would fall in America. At that time, mortgage finance players assumed this was a worst-case scenario, with an outside chance of coming true. Today, Deutsche Bank researchers say these predictions will likely become a reality, with the total peak-to-trough decline of US home prices hitting nearly 40%. In the current outlook, they say home prices will drop a further 10 to 12% from current levels. The results are part of a nationwide projection that represents a weighted average across 100 individual metropolitan statistical areas (MSAs). The projections come from the securitization arm of the investment bank and is the first forecast expanded to include more factors that impact home prices overall as well as a variety of ranges (month-to-month, peak-to-trough). “A change in market psychology (which can both cause, and be caused by, recent home price increases), some signs of labor market stabilization and various government programs aimed at easing the housing crisis have all been constructive for housing,” write the researchers. “These changes may have helped abate the freefall in prices we saw in early 2009, and the “overcorrection” we started to see in home prices.” The researchers note that recent home price gains, and the attention it garners, has likely run its course, with no seeable future home prices rises across the board. Government bailouts lack the potency to counter larger issue of unemployment, tight credit and the rising negative equity this eport represents. In the worst of it, with another 29% decline in home prices projected, the NY/NJ MSA has Deutsche Bank’s holds the direst outlook of the 100 MSAs. While from Q209 to Q309, prices in 69 of our 100 MSAs showed increases, the research provides some harsh realities:

In a housing market that has always been wildly heterogeneous, e.g., where Las Vegas price declines have been more than 10x the declines in Dallas, the impact of psychology, and policy, will exacerbate the difference among markets. Miami, with 36% of its non-agency mortgages in foreclosure (more than any other MSA) … Detroit, with 18% unemployment and out migration … NY, where homes still cost 7x the median income … these are not markets where “preventing preventable foreclosures” and $8,000 checks can solve the housing crisis. Ironically, however, we can envision some markets, where foreclosure inventory is light, unemployment is below average, and homes are affordable, where the homebuyer credit could lead to a little market froth, especially at entry level price points, such as in Austin, TX and Fort Collins, CO.

Write to Jacob Gaffney. The author holds no relevant investments.