Home prices seen turning the corner

NEW YORK (Reuters) - U.S. home prices are nearing the end of a three-year slump and should rise in 2010, though the overall economy can rebound even if the housing market does not, according to a Reuters poll.

Movers take out belongings to place in storage from a home that is for sale in Batavia, Illinois in this June 23, 2009 file photo. REUTERS/Jeff Haynes

A new-found stability will be a far cry from recovery, however as record foreclosures, a sizable pool of bank-owned property, steep unemployment and wage cuts temper a rebound, economists said.

House prices will fall just 3 percent more before stabilizing, or 33 percent from the peak in mid-2006, based on the median forecast.

Thirteen economists, or about a third of the 41 polled, said the trough has already been reached while 27 of them said the bottom would be hit within a year. Just one said it would take up to two years.

“We believe that April of this year marked the trough for home prices, though the potential for a significant increase is limited,” said Guy LeBas, chief fixed income strategist at Janney Montgomery Scott in Philadelphia.

The closely watched Standard & Poor’s/Case-Shiller 20 city-index will drop by 14 percent this year before reversing course and climbing 2 percent next year, based on the median forecast.

“A lack of credit availability, stressed consumer balance sheets and growing unemployment are not signs that suggest an environment of substantially rising home prices,” said LeBas.

The poll found 29 of 39 economists said a housing price rebound is not needed to end to the economic slide.

“But it would be a prerequisite for a strong recovery, and that’s not in the cards right now,” said Adolfo Laurenti, deputy chief economist at Mesirow Financial in Chicago.

The weakest housing market since the Great Depression was pivotal in propelling the U.S. economy into recession.

Credit providers are fewer, as bad bets on mortgages created when lending standards were lax forced bank mergers and shut other major financial companies.

“Broader economic recovery cannot be achieved without a healthy financial system and a household sector confident in their financial future, including housing wealth,” said Robert Denk, assistant vice president of forecasting and analysis at the National Association of Home Builders.

Still, financial system bailouts and economic stimulus programs, including an $8,000 federal first-time home buyer tax credit that ends November 30, helped put a floor under the fragile housing market.

Pending home sales shot up to a two-year high in July, far surpassing estimates and rising for a record six straight months, the National Association of Realtors said on Tuesday.

When asked to rate average home prices on a scale of 1 to 10, with 1 being extremely undervalued and 10 being extremely overvalued, the median forecast was 4 from 38 economists. This suggests prices have shifted to being slightly undervalued after being battered for more than three years.

In recent prior Reuters housing polls, prices were deemed slightly overvalued with a 6 reading.

Home prices and sales soared in the first five years of the decade. Loose lending and sales to speculative investors who aimed to flip houses for quick profit accelerated the boom as well as the bust.

The economy is emerging from recession with real GDP growth likely in the third quarter as fiscal stimulus feeds consumer confidence and slowly reduces business inventories, said Celia Chen, senior director of housing economics at Moody’s in West Chester, Pennsylvania.

The home price correction, Chen said, has been overzealous compared with long-term housing needs.

“Relative to the price implied by current income per household, mortgage rates, inflation and the unemployment rate, the 2009 Q2 median house price has never been this undervalued in its 34-year history,” she said. “Relative to apartment rents, however, the median price is better balanced and would be considered fairly valued.”

additional reporting by Dinesh Mehta in Bangalore, polling by Bangalore Polling Unit