House prices will continue to drop through the rest of the year and will begin 2011 lower than they were in 2009, according to a webinar hosted by Scott Sambucci, vice president of data analytics for Altos Research. The culprit behind the forecast is the weight of the shadow inventory of homes yet to hit the market. But, Sambucci said, anyone who generalizes the size and length of time it takes to clear the shadow inventory will be wrong. “The recovery period is dependent on inventory,” Sambucci said. “But different markets move differently. It’s important to get local.” Other firms have released estimates of the national shadow inventory and the general time it could take to clear it. According to Morgan Stanley, the shadow inventory of foreclosures could top 7m properties and take nearly four years to clear. The credit rating agency, Standard & Poor’s, put the total aggregate balance of the shadow inventory at $480bn worth of loans and would take nearly three years to clear. Barclays Capital reported that it could peak at 4.7m in the summer of 2010. The research firm, Capital Economics, said the shadow inventory could reach 5.5m by the end of 2011. According to Altos Research, the 20-city composite price index, which measures home prices on a rolling 90-day scale, bottomed in 2009 because of the shadow inventory, whatever the estimate. It rose to a peak in July 2009 and fell to where it is now in July 2010 (see graph below). Sambucci said it should drop below the 2009 bottom and start at a new low in 2011 before rising back up to the same levels seen in 2010. But that was a general forecast, and specific markets behave differently. Recovery times can even differ at the ZIP code level within metropolitan statistical areas (MSAs). His example was Sacramento, thought to be one of the MSAs worst hit by the subprime mortgage crisis. Sambucci took a closer look. Altos looked at three areas within the Sacramento MSA: Carmichael, Rancho Cordova, and Davis. In Carmichael (the black line in the graph below), prices actually increased at the end of 2008 while prices in Davis (brown line) dropped slightly to peak later at the end of 2009. Rancho Cordova (green line) prices ended 2008 at its bottom and has slowly climbed since. Going forward, the recovery times have shifted. Prices in Carmichael plummeted in the fall of 2009 and began its recovery there. Prices in Davis are still falling and have dropped below its two neighbors. The key, Sambucci said is for analysts to find those inflection points when inventory and pricing levels change and begin to trend. From these points, inventories will continue in whatever direction they’re pointing, whether it be moving up or moving down. “The shadow inventory in each market,” he said, “has momentum.” Write to Jon Prior.
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