Capital Economics released a report Wednesday predicting that the recent, second downturn in US real estate values will continue throughout 2011. The report also warned that conditions could get even more difficult if a cycle of falling prices and rising foreclosures continues.
The second downward leg in house prices that began last year will continue throughout this year and take prices to a new cycle low, some 5 percent below current levels, said Paul Dales, a senior economist at Capital. Incredibly favorable valuations and exceptionally low mortgage rates will not prevent this fall in prices. Valuations and affordability are much less important when demand is constrained by poor economic conditions and the effects of the previous plunges in asset prices, Dales added.
Dales said that 25 percent of US homeowners are underwater, meaning they owe more on their home than it's worth. Another 25 percent, Dales said, do not have enough equity in their homes to qualify for a second mortgage. He added that even if sales should continue to rise, it would not prevent this continued decline in values.
Rising employment and incomes will mean that home sales will continue to edge up from their still depressed levels. The existing market will continue to outperform the new market, as buyers are attracted to heavily discounted foreclosed homes, the economist explained. Rising home sales will not prevent prices from falling either. Even though sales rose in the 1990s, prices still fell, he went on.
Dales does offer a glimpse of hope for the nation's rental market, explaining that with well over 5 million homes either currently on the market or in some stage of foreclosure, there will be a flood of properties available for rent moving forward.
