Economy.com sees home prices down 20 percent

NEW YORK (Reuters) - A rapidly deteriorating U.S. economy will cause home prices to drop by 20 percent peak-to-trough, a leading economist said on Wednesday.

Mark Zandi, chief economist and co-founder of Moody's Economy.com, said he also expects a recession in the first half of this year.

Zandi, speaking at the Reuters Housing Summit in New York, said this is a "significant" change from the Moody's Economy.com outlook published in December, which called for a 13 percent drop.

He expects home sales to hit bottom this spring, housing starts to reach a nadir this summer, and house prices to trough in the spring of 2009.

"Three months ago, I expected the economy to skirt a recession. Now, I expect it to suffer a recession (in the) first half of 2008," he said.

"To be more precise, the economy is contracting. It's been contracting for December, January and probably February," he said. "Another three, four, five months of contraction and that would be a recession."

Zandi expects the Federal Reserve to slash the federal funds rate, currently at 3 percent, by another percentage point this year.

He also said the U.S. central bank "misjudged" the severity of the housing downturn and credit conditions. "They were clearly slow to respond," he said of U.S. policymakers.

Zandi said he has been in contact with different Federal Reserve and Treasury officials.

"They now seem to be on high alert, fully engaged and thinking creatively about what they can do and what is next," he said.

While monetary policy has helped the housing market in terms of lower resets on adjustable-rate mortgages, it is not going to be enough to fix all the issues the sector faces.

"It is as if the pipes are broken and you can pump more water through, but it is not going to get distributed because it is going to leak out," he said.

Zandi said rapidly rising foreclosures is high on his list of significant problems facing the U.S. economy.

"The surge in foreclosures and delinquencies on mortgages is accelerating, not abating, and obviously we are at levels we have never seen before," he said. "This is a significant problem for the economy."

The surge in foreclosures is putting further downward pressure on the housing market because it adds to the inventory of homes for sale, which is already at a lofty level.

"This puts further pressure on house prices and therefore on the ability and willingness of consumers to spend," he said.

Zandi said households that are going through foreclosures are also under tremendous pressure, having to rein in their spending very significantly.

"They are also having a measurable impact on spending, particularly areas of the country where foreclosure problems are more serious," he said.

For each foreclosure on a street block, it reduces the value of all homes on that block by almost 1.5 percent, he said.

(Editing by Phil Berlowitz)

(For summit blog: summitnotebook.reuters.com/)