The recent bond rally is good news for the secondary market, but it may be an unsustainable trend, as analysts predict more declines in the housing industry, potentially sapping mortgage-backed bonds. Last Friday's speech by Ben Bernanke outlining the possibility of additional stimulus, helped sentiment amid a week of negative macroeconomic news. For example, National Association of Realtors home sales for July dropped 27% (3.83 million annually) to its lowest rate since NAR began tracking, after the push-forward demand from the homebuyer tax credit began to show pull-through. Economists across the board are currently bearish on housing now that incentives provided by the government, while temporarily helpful to the market, did little to help the overall economy. "The bottom line is that housing demand has dropped sharply due to sales being moved forward, still high unemployment, and tighter lending standards," said Econoday economist Mark Rogers. "This sector likely will remain soft until employment improves. However, sales likely will come off the anemic July pace as we get further away from this period of stolen sales." Analysts at JPMorgan support Rogers claim of a softening of the recovery. In a research note from Abhishek Mistry, Edward Reardon, Asif Sheikh and John Sim, the analysts say home prices are now likely to surprise to the downside. "The street is already running scenarios that consider another 10% decline in housing," they write. "We maintain our bias towards 2006/2007 fixed-rate paper where the coupon helps offset market price volatility," they said. "This is on top of an aging delinquent-loan population that is expected to push severities even higher." Celia Chen, a senior housing economist for Moody’s Investors Service predicts imbalances in the market will continue until 2012. In her view, the impaired credit of consumers, mixed with a glut of supply, will weigh negatively on home-ownership demand. A self-correcting recovery lasting several quarters will likely reverse these trends moderately, she adds. "In the meantime the lingering excess supply will weigh on house-price appreciation until supply and demand conditions are better balanced," Chen said. "While the national house price index will reach bottom early next year, price appreciation will be soft for the next couple of years." Quantitative Easing Tempered Secondary market analysts at Deutsche Bank pointed to fundamentals improving in the market as prices and interest rates begin to move more and more in concert with one another. According to an August MBS outlook report, Deutsche analysts say that the impact of economic crises elsewhere, mainly in Europe, provided some drag on the market. The result of a return to the correlation of house price as a driver of interest rate means the Fed will not necessarily buy much more Treasuries in a rally. "This will, however, be tempered by the fact that the Fed owns mostly new production 4.5% and 5% MBS, which are backed by mortgage loans that are better quality in terms of credit and loan-to-value ratios, and thus will be less affected by a modest decline in home prices than older MBS," the report notes. Write to Jacob Gaffney.