U.S. housing market has further to fall-Goldman

By Emily Kaiser

WASHINGTON, Jan 14 (Reuters) - The U.S. housing market may have much further to fall because of the huge supply of unsold homes, and the time may be right for large-scale government intervention, a top Goldman Sachs economists said.

In a paper released on Tuesday night, economist Jan Hatzius said total credit losses may exceed $2 trillion, up from his March 2008 forecast for losses of around $1.2 trillion.

More than half of the total represents losses on residential mortgages, with the rest coming from commercial real estate, credit cards, auto loans and corporate debt.

Hatzius said the Case-Shiller index, which tracks home prices in 20 major cities, may have another 20 to 25 percent to fall by the third quarter of 2010.

"The good news is that housing valuations at the national level have largely normalized following the price declines of the past 2-1/2 years," Hatzius said.

"The bad news, unfortunately, is that our formal house price model suggests that it may not matter all that much how close house prices are to fundamental value."

Hatzius said that although various measures of affordability and price were now at or near historical norms, there were so many unsold homes on the market that it was pushing prices well below normal levels.

Falling house prices can drive up defaults and worsen both banks' balance sheets and the broader economy, so it was "appropriate" for the government to consider more aggressive intervention to limit the number of defaults, he said.

"The huge number of defaults over the next few years suggests a focus on bulk programs, which can be implemented across the board and do not require detailed knowledge of the situation of each individual borrower," he said.

Writing down the principal amount of home loans was a more effective way of reducing defaults than lowering the interest rate. Policy-makers may want to "expend significant resources" on subsidizing such loan modifications to stop the housing rot from causing severe economic damage, he said.

Hatzius acknowledged that such a program would be difficult to design and implement fairly, and ran the risk of inadvertently rewarding people for making bad bets or giving public money to borrowers who didn't really need the help.

If conditions deteriorate further, he said the government might consider becoming a "landlord of last resort" by buying up houses at low prices and renting them out to people who lost their homes to foreclosure.

He also backed steps by the U.S. Federal Reserve and Treasury Department to push down mortgage rates, and said financial firms may need even more capital to cope with the looming credit losses.

"Even if policy-makers are successful in averting a worst-case outcome, the U.S. housing market will likely remain a drag on the financial system and the broader economy for an extended period," he said. (Editing by Tom Hals)