Citigroup Global Markets analysts suggested that there will be further significant declines in home prices despite historically low mortgage rate levels.

Using two methods, an income and rent-based measure and a model based on historical home prices, analysts estimated another 15% drop nationally.

They believe that a model that also considers renting is valid as historical data suggest, "overall the variation in the home price versus rent relationship at the national level is virtually completely due to the variation of home prices."

A further analysis that looked specifically at home price data for Los Angeles also appeared to Citigroup that rent trends "are more closely tied to home prices than income or unemployment - slowdowns in rent growth in the 1990s and during the past two years were coincident with housing price downturns."

The firm's methodology in the first analysis incorporated mortgage payment to income ratio; mortgage payment to rent ratio; an adjustment to mortgage rates based on estimated state concentration of jumbos; the recent rate rally with consideration for borrowers underwater in their mortgages; foreclosures; and rising unemployment.

Under these assumptions, and incorporating the weak housing market of the 1994-2002 period on average affordability and rent ratios, the model projected a decline of 7.3% more in home prices.

Incorporating instead the minimum ratios over the same period produces a national home price decline of 20.9%. Analysts think that given the severity of the current downturn that a 7% decline is too optimistic, while population growth suggests the 21% further decline is too pessimistic.

By state, California produced similar results, noted analysts. "As a result, we would guesstimate something in between, which would mean about another 15% drop in CA and US home prices going forward."

Under this analysis, Florida and Nevada results ranged from negative 19% to about negative 30%, which based on Citigroup's estimate for CA and the U.S., would suggested further declines of 25% for these two states. Arizona was more in line with California and the U.S.

A simpler model that compared inflation-adjusted home prices against an historical average, as well as, the historical low produced home price declines of 6% and 25%.

Analysts said they favor home prices adjusted for inflation +1% and using the home price drop implied by the historical low.

Under these assumptions, their measure suggests a further 15% drop in home prices nationally, which would put home prices back to 2001 levels. It also implies CA and FL could see further declines of 20%, AZ 15%, and NV just 5%.

While mortgage rates tend to benefit home prices, Citigroup says that if the decline is related to a deteriorating economy it can offset the positive impact of lower rates. A precedent for this is seen in the early 1990s in Los Angeles where despite a 300 basis point drop in mortgage rate, home prices steadily declined from 1990 to 1993, they noted. 

Even after 1993, home prices continued to decline, but at a slower rate, they said. "It appears that until unemployment began to drop and consumer confidence turned, home prices did not react that much to declining mortgage rates," Citigroup analysts said.

Citi's report also attempted to gauge the length of time it would take for home prices to decline to their model projections.

Using housing inventory data, they calculated 17 months nationally, 45 months for Nevada, 37 months for Florida, 24 months for California, and 20 months for Arizona.

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