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Real Estate

Real Estate Forecast: Home Prices Limp into 2012

Home sale prices in the U.S. are expected to fall a further 2.4 percent in the second half of 2011, compared to the first half, as bank-owned properties drive down prices, unemployment remains high, and consumer confidence stays weak, according to a report released Friday, July 8, by Truckee (Calif.)-based data and valuation firm Clear Capital. Of 50 U.S. markets tracked for the report, only five metro areas are forecast to produce home-price gains in the second half: Washington, New York, Orlando, Dallas, and San Francisco.

U.S. home prices fell by 3.2 percent in the first six months of 2011 compared to the previous half, with median home prices dropping to $170,000, despite a 0.9 percent increase in the second quarter, estimates Clear Capital. The peak of the market was in summer of 2006, at $240,000, indicating a median price decline of nearly 31 percent since then.

The modest increase in the second quarter may be seasonal, as homebuying typically picks up in the warmer months. It is nonetheless encouraging, says Alex Villacorta, director of research and analytics at Clear Capital. "That’s not bad, as we’re under heavy inventory levels, high unemployment, and consumer confidence levels are not where they need to be," he says. "It’s not the type of increase that signifies a V-shaped recovery. It will be more muted."

A Boom in Distressed Sales

Before the housing collapse, the number of distressed sales historically made up a small percentage of the market. In the first half of 2011, however, bank-owned homes represented more than 30 percent of total sales, which is far above pre-2006 levels of less than 5 percent, according to Clear Capital. "A lot of the decline is a result of distressed sales," says Celia Chen, senior director of the Moody’s Analytics research staff, specializing in housing economics. In 2010 there were 1.7 million distressed sales, up from an average of 450,000 per year during the pre-collapse period from 2000 to 2005, according to data from Moody’s.

The rate of decline has tapered off in recent months, following a slow winter homebuying season and a double dip earlier this year. Prices are expected to be less volatile, though "it is unlikely national home prices have reached a true and sustainable bottom," states Clear Capital’s report. The firm expects national home prices to drift slightly downward until next year because of such factors as the financial crisis in Europe and jammed discussions regarding the debt ceiling in Washington. By May, the unemployment rate stood at a high 9.1 percent, according to U.S. Bureau of Labor Statistics data.

Clear Capital projects the Virginia Beach, Va., metropolitan area will be the weakest-performing market over the next six months, followed by the metros of Cleveland, Minneapolis, Chicago, and Fresno, Calif.

Virginia Beach Needs Greater Job Gain

Home prices in the Virginia Beach metro are forecast to fall a further 8.6 percent in the second half, compared to the first half, having already dropped by 3.9 percent from January to June. The area’s unemployment rate, pegged by the BLS at 6.5 percent in April, is better than the national rate. Still, local employment growth is anticipated to stay at a poor level and the delinquency rate is likely to rise, enabling home prices to continue weakening, according to a first quarter report by the National Association of Realtors. The share of distressed sales in Virginia Beach also has been increasing, according to Clear Capital.

Nearby Washington, the strongest market in the forecast, has enjoyed steady local job growth—the unemployment rate in April was 5.5 percent, show BLS data. The Washington metro is also more affordable than most markets, according to NAR. Its foreclosure rate, at 1 out of every 793 homes, is well below the national level of 1 in 605, show May 2011 data from RealtyTrac. Clear Capital estimates that distressed sales have fallen to 15 percent of total sales.

Under current conditions, and presuming continued job growth, Villacorta and Chen both say home prices may reach bottom in the first quarter of 2012. In its most recent economic projection, the Fed expects the jobless rate in 2012 to fall to between 7.8 percent and 8.2 percent, with gross domestic product growth anticipated at from 3.3 percent to 3.7 percent. "Those [price] upticks from April are being sustained," says Villacorta. "Albeit slim, it’s a step in the right direction."

Click here to see which metros are forecast to perform best in the second half of 2011.

Wong is an associate editor for Bloomberg Businessweek. Follow her on Twitter @venessawwong.

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