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Uneven fall of house prices could tumble another 3%

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Analysts at both Bank of America Merrill Lynch and Capital Economics forecast another 3% fall for house prices before they reach a bottom at the end of the year. While homes on the lower-tier price range will get there faster and at a much harder fall, a housing recovery is in sight, analysts said. Tiers are based on the Standard & Poor's/Case-Shiller index and are determined by the prices of the homes sold that month. The price splits occur where an equal number of homes can be placed in each tier. From January 2000 to the peak in 2007, prices in the lower tier increased 150%, according to Capital Economics. These lower-priced homes accelerated faster than the 120% gain for middle-tier house prices and the 95% increase in the most expensive neighborhoods. But since that peak, house prices in the least expensive areas dropped 45% and are still falling faster than anywhere else.

Paul Dales, senior U.S. economist for Capital Economics, said there are no signs credit criteria for first-time homebuyers is loosening and the foreclosure rate on subprime loans, 14.7%, far outpaces the 3.5% foreclosure rate on prime loans. "The much faster rises in the low tier were largely due to the increased availability of sub-prime loans, the reduction in down payment requirements and the introduction of teaser mortgages attracting more first-buyer buyers, who are more active at the low end," Dales said. BofAML analysts said house prices will move slightly higher in the months ahead because of the more heated home-buying season. Anthony Sanders, real estate finance professor at George Mason University, predicted the S&P/Case-Shiller report due Tuesday will only show another decline. Still, BofAML analysts said prices should head down again to a bottom in late 2011 or early 2012, 3% below the level in the first quarter of this year. Dales added that 3% fall will be hardest felt at the low end of the market. The one-year growth rate for home price indices, or the HPA, is a different story, according to BofAML analysts. They believe the HPA, or the rate at which home prices are growing or falling, bottomed in March, will stay in negative territory until the end of 2012 and then begin "a long and sustained period in positive territory." As the HPA rose steadily in the early 2000s through 2005 the difference between the asking price and selling price on the lower-rated subprime mortgage-backed securities tightened. But when the HPA turned down, prices collapsed and eventually reached the triple-A rated ABX market for these structured products. "Given our belief that HPA has bottomed, we believe that this represents the bottom for ABX prices in this double dip," BofAML analysts said. "Given the widespread bearishness on home prices, this upbeat view on HPA, and by extension home prices, generated numerous conversations and discussions over the past week: disbelief of a nascent housing recovery remains highly elevated." Write to Jon Prior. Follow him on Twitter @JonAPrior.

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