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Deutsche Anticipates Further Declines in Home Prices

With more home price information following the end 2Q08, Deutsche Bank Securities updated its outlook for U.S. home prices. 

Assuming a 6.5% mortgage, analysts estimated home prices will probably decline another 15.6% from second quarter levels. 

Given the 16.6% drop that has already occurred, this would be a peak-to-trough drop of 32.2%. Assuming a 6% mortgage rate in light of the recent takeover of the GSEs by the government, analysts projected prices would need to decline 12.3% before affordability would fully revert to its mean. They expect the correction will easily stretch for "another four to six more quarters at a minimum, and probably longer."   

The placement of the GSEs into conservatorship has helped reduce mortgage rates. 

As reported yesterday by Freddie Mac, 30-year fixed mortgage rates dropped 42 basis points to 5.93% from the previous week.  

However, while lower mortgage rates are helpful, Deutsche Bank stated, other factors still pose additional downside risk to home prices such as the tight credit standards, weakening economy and increasing unemployment. 

In addition, analysts point out that there is some evidence that suggests more borrowers are defaulting because of "negative equity alone," rather than the combination of negative equity and insufficient income as has traditionally been the cause. 

Since their last report in May, analysts say it has become increasingly apparent the negative impact on home prices caused from the foreclosure inventory.  So the addition of new defaults "is adding distressed supply to already fragile markets." Deutsche suggests this issue of distressed supply could loom larger than the fundamentals (or affordability) of housing.

Looking within the top 100 MSAs, those with the largest declines left are Miami, Ft Lauderdale-Pompano Beach-Deerfield Beach, Orlando and West Palm Beach-Boca Raton-Boynton Beach - all between 30%and 40%, assuming a 6.5% mortgage rate. Places like LA, Las Vegas and Phoenix have between 17% and 22% to go, and Metropolitan DC and the NY/NJ area have another 31% price decline estimated. Using a 6% rate knocks roughly about 4% off the declines. 

There are several MSAs that have fully or over corrected, noted analysts, based on their affordability method.

Some of the places were Detroit-Livonia-Dearborn, MI; Akron, OH; Merced, Modesto and San Diego, CA; and Cape Coral-Ft Myers and Palm Bay-Melbourne-Titusville, FL. 

Based on the current conditions and information in the market, Deutsche concluded, "we are only slightly more than halfway there" to a bottom in home prices.

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