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Deutsche Releases 2-yr. Outlook

With the mortgage market currently suffering from headline risk, Street analysts are saying that housing is overvalued.

Deutsche Bank recently issued an in-depth report on the outlook for U.S. home prices over the coming two years. The firm's analysis focused on the top 25 metro areas based on subprime/Alt-A mortgage loans outstanding and the top six worst metro areas - Detroit, Boston, Providence, St. Louis, Cleveland and Memphis - based on serious mortgage delinquencies. In their study, they said the U.S. housing market entered this year in "bubble mode" and that more than half of the housing markets were overvalued by 20% or more relative to historical relationships among home prices, income, interest rates, and home prices relative to rents.

Their analysis predicts that for the U.S., home prices are expected to decline 1% in the "expected case." For certain MSAs, the outlook is for significant declines over the next couple of years. For example, Miami and Orlando are forecast to slow 15% and 14%, respectively. Particularly regarding Miami, Deutsche analysts noted that affordability remains a big hurdle as median home prices remain near their all-time high. In addition, 20% of Miami's outstanding mortgage loans are subprime, which "exposes the region to potentially greater risk from this fragile sector," Deutsche analysts said. These two factors suggest that the correction will be ongoing and could get worse before a bottom is found, they added.

MSAs where HPA is forecast to decline 10% to 13% include Phoenix, Las Vegas, Sacramento, Fort Lauderdale and Tampa. Several of these areas have strong tourism and retirement attractions that contributed to a housing boom. For many, construction employment has been a major contributor to the economy, so the slowdown in housing and related job losses will have an impact on these communities. Deutsche also noted that while inventory has built up and demand has dropped in these places, prices have not come down all that significantly. For example, they point out that in Phoenix, prices have dropped only around 3%.

In their "expected case," projections of 5% to 10% declines in HPA include Los Angeles, Riverside, Calif., Washington DC, San Diego, Orange County, Detroit, Providence and Memphis. In several of these areas, particularly the District of Columbia, Riverside, Los Angeles, and New York, affordability remains an issue. At the same time, areas such as DC, Riverside and LA continue to experience good population growth.

Cities expected to show flat to modest gains are Chicago, Atlanta, Denver, Houston, Minneapolis, Dallas and Baltimore. A common factor in many of these areas, the Deutsche Bank report stated, is the affordability of housing, diverse economies, and steady population growth.

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