Economists at Moody's Analytics expect a pickup in home sales and construction in 2011, but admit they are "nervous" about their price forecast because of the high level of seriously delinquent loans, distressed sales, and strategic defaults.

Moody's Analytics chief economist Mark Zandi is forecasting the Standard & Poor's Case-Shiller house price index (HPI) will decline another 5% from the third quarter of 2010 to the third quarter of 2011 when prices will bottom out.  

There is "uncertainty" about the timing of foreclosure sales due to the robo-signing and other foreclosure processing problems, Zandi said.

Moody's Analytics is forecasting 1.5 million in loan modifications in 2011— the same as last year.  But there has been in a decline in HAMP modifications, which he called "disappointing."

The percentage of strategic defaults (where an underwater borrower can afford the payments but chooses to walk away) has been rising and now accounts for an estimated 20% of foreclosure sales.  He noted that four million homeowners are 50% underwater. 

"My worry is that it does not take much of a catalyst to convince these folks that it makes no sense to hold on," he said. 

"The risk is we will see more strategic defaults than I am anticipating.  That could re-ignite that very vicious cycle," Zandi said. 

On the positive side, credit performance is "improving quite quickly," Moody's believes. Early stage delinquencies fell in 2009 and leveled off in 2010.

"If we are able to get through this last bulge of properties that are close to foreclosure with the kind of price declines we are anticipating," he said, "we should be in pretty good shape."

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