US home prices won't remain steady: Goldman

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Published October 28, 2009

US home prices won't remain steady: Goldman


(NEW YORK) The stabilisation in US home prices won't last, according to economists at Goldman Sachs Group here.

'The risk of renewed home price declines remains significant,' Alec Phillips, head of Goldman's Washington office, said in a research note last week. 'Our working assumption is a further 5 per cent to 10 per cent decline by mid- 2010.'

Government stimulus programmes, including the US$8,000 first-time buyer tax credit, foreclosure moratoria and Federal Reserve purchases of mortgage- backed securities, have helped stem the slump in housing.

On the supply side, the programmes have reduced the number of foreclosed houses reaching the market by about 450,000, according to Goldman calculations, said Mr Phillips. They have also boosted sales by about 200,000 homes, he said.

'Taken together, these moves might have added 5 per cent to home prices nationally,' Goldman's Mr Phillips wrote.

'If this estimate is correct, it suggests that most of the increase in home prices since this spring - which has totalled between 2 per cent and 4 per cent in seasonally adjusted terms - has been due to temporary factors.'

'Much of this strength seems to have been policy- induced,' Mr Phillips wrote in a section of the report titled: A False Bottom?

An economist with the Federal Reserve Bank of San Francisco also said the housing market faces a 'difficult' return to normal for another reason. Government-sponsored enterprises (GSEs) now own or guarantee most mortgage lending while alternative sources have disappeared.

'Fannie Mae, Freddie Mac, and Ginnie Mae now own or guarantee an overwhelming share of originations,' bank senior economist John Krainer wrote in a paper released yesterday.

'At the same time, non-agency mortgage securitisation and loans retained in lender portfolios have largely dried up.'

The US government seized control of Fannie Mae and Freddie Mac in September 2008, after a surge in mortgage defaults threatened to topple the companies.

The Treasury Department has committed as much as US$400 billion to keep the two enterprises afloat while President Barack Obama's policymakers figure out how to restructure their operations.

'With the vast majority of current mortgage lending now intermediated in some form by the GSEs, it will be difficult for the housing market to return to normal,' Mr Krainer wrote. -- Bloomberg, Reuters