May 26 (Bloomberg) -- The slump in the U.S. housing market that caused the median value of homes to decline 24 percent since 2006 may bottom next month without any prospect of a rebound for another year, according to estimates from chief economists at Fannie Mae and Freddie Mac, the Mortgage Bankers Association and national realtors and homebuilder groups.

Existing home sales probably won’t reach pre-boom levels until the third quarter of 2010 and housing starts won’t surpass 1 million until 2011, a barrier last broken six decades ago, the economists said.

“There are very few V-shaped recoveries in the history of real estate, and this one is likely to be even slower because of the size of the bubble,” said Robert Shiller, the Yale University professor who, with economist Karl Case, created home price indexes in the 1980s now used by Standard & Poor’s.

The rebound will be so anemic that 2009 building starts will total about 496,000 homes, the lowest since the end of World War II in 1945, according to the economists’ forecasts. Foreclosures on pay option adjustable-rate mortgages and a backlog of bank-owned properties will slow any revival and keep housing from playing its traditional role of boosting economic recovery.

Residential construction and home sales led the way out of the previous seven recessions, with housing starts improving an average seven months and resales gaining strength about four months before the economy picked up.

‘Green Shoots’

The world’s largest economy probably will grow 1.9 percent next year, according to the average estimate of 56 analysts surveyed by Bloomberg. After each of the last seven contractions, it expanded more than 3 percent on average in the first year of recovery.

Federal Reserve Bank of Dallas President Richard Fisher said earlier this month that the U.S. is on the verge of rebounding with “healthy signs -- the stirrings of what I call green shoots.” So did former Fed Chairman Alan Greenspan, who cited “seeds of a bottoming” in housing during a May 12 speech at a National Association of Realtors conference in Washington.

“If you are looking at prices relative to income and rents, you could argue that we are at the bottom, and I’m cautiously optimistic that we may be,” said Thomas Lawler, a former Fannie Mae economist in Leesburg, Virginia. “It’s possible, however, that we could have a second wave of foreclosures and the very small amount of support the economy might have gotten will turn into the reverse.”

Prices Fall

Data released today showed foreclosures are still weighing on the housing market. Home prices in 20 major metropolitan areas fell 18.7 percent in March from a year earlier as foreclosures rose, according to the S&P/Case-Shiller index. Economists forecast the index would drop 18.3 percent.

The recession started after U.S. banks and Wall Street firms securitized mortgage loans made to the riskiest borrowers to earn fees only to see homeowners default, prices fall and the value of the bonds dwindle.

Three of the biggest investment banks were brought down by home loan-related investments. The U.S. government committed $29 billion to engineer the takeover of Bear Stearns Cos. in March 2008 by New York-based JPMorgan Chase & Co. Six months later, Lehman Brothers Holdings Inc. filed the largest bankruptcy in U.S. history after becoming the biggest underwriter of mortgage- backed securities as real estate prices peaked.

Subprime Losses

Bank of America Corp. of Charlotte, North Carolina, bought Merrill Lynch & Co. in January after Merrill recorded more than $50 billion in losses and write downs tied to subprime home loans.

Homeowners like Craig Mitchell of Boise, Idaho, said they’re paying the price for Wall Street’s greed.

Mitchell, 66, said his video-editing business has dwindled in the recession. He said he’s now being forced to sell his truck to make his mortgage payment while he seeks a buyer for the three-bedroom home he owns in a state with the fifth-highest foreclosure rate in the U.S. The house is priced at $289,000, about $140,000 less than what it would have fetched three years ago.

Mitchell may be waiting a long time for a buyer as the housing market tries to recover from the worst slump since the Great Depression.

While new-home sales traditionally lead all other indicators in a recovery, it may not be the case this time because the drop has been unlike any other since the 1930s, Lawler said.

California Slump

“History suggests that new-home sales bottom long before unemployment peaks, and perception of the economy starts to improve long before we see actual economic improvement,” Lawler said. “This time around we don’t know if that will hold true.”

Prices in California fell for six years during the last major housing slump in the 1990s, and didn’t return to their 1991 peak until 2006, according to the Federal Housing Finance Agency.

About $40 billion of mortgages at U.S. banks have payments 90 days or more overdue, more than triple the $11.5 billion of homes the banks already hold, according to data from the Federal Deposit Insurance Corp. in Washington. Another $78.8 billion are 30 to 89 days overdue, the FDIC said.

Bank of America and Citigroup Inc. in New York were among banks that halted foreclosures to allow homeowners to seek modifications, adding to the number of overdue home loans not in foreclosure. More than 1.6 million mortgages have been modified since 2007, according to Hope Now, a coalition of mortgage companies in Washington. Between 41 percent and 46 percent of those loans may relapse, according to Office of Thrift Supervision data.

Alt-A Loans

There were more than 2 million Alt-A loans in the U.S. in March, 28 percent of them held by investors who don’t live in the properties they own, data compiled by the Federal Reserve show. That includes interest-only home loans and pay-option adjustable rate mortgages. Option ARMs allow borrowers to pay less than they owe, with the rest added to the principal of the loan. When the debt exceeds a pre-set amount, or after a pre- determined time period has passed, the loan requires a bigger monthly payment.

Property owners with option ARM mortgages can see payments double at a time when home values are tumbling, said Rick Sharga of RealtyTrac Inc., the Irvine, California-based seller of foreclosure data. Some borrowers will walk away, rather than pay more for a property that’s worth less, he said.

New Foreclosure Wave?

“We’re about to have a whole wave of option ARMs,” Sharga said. “These will probably default at rates even higher than subprime mortgages because when they reset almost every one of them will be upside down.”

Even if prices stop falling, owners in California, Florida, Nevada and Arizona -- states hardest hit by the housing slump -- probably won’t feel any relief, said David Berson, chief economist at PMI Group Inc. in Walnut Creek, California, the fourth-largest insurer of U.S. home loans. Prices there may stagnate for at least another two years, Berson said.

“The so-called sandy states that saw the biggest gains during the boom now have the most foreclosures and the most housing stock to work off,” Berson said.

The national median home price will fall until at least 2011, according to Fannie Mae. Home prices in states such as Florida dropped 30 percent in the past year, compared with a nationwide average of 12 percent.

Taking a Beating

The 34 percent decline in the Dow Jones Industrial Average last year, along with the drop in home prices and the recession, have made Florida residents like William LaPoint less optimistic.

Second-floor units in LaPoint’s condominium at the Pelican Marsh Golf Club in Naples, Florida, sold for as much as $800,000 two years ago.

“We’d get at least $50,000 less for our home today, compared with what we could have gotten two years ago,” LaPoint said. “It’s not what you need when you’ve seen your retirement funds take a beating.”

Homebuilder executives aren’t ready to call the end of the housing slump that slashed about 60 percent from the market value of the 13 largest residential construction companies since 2006.

Toll Brothers Inc., the largest U.S. luxury builder, said May 20 that it’s “mothballing” 33 communities, even as second- quarter customer deposits increased. The Horsham, Pennsylvania- based company plans to maintain the grounds in the areas as it waits for housing demand to firm, Chairman and Chief Executive Officer Robert Toll said during last week’s conference call.

‘Feeble Recovery’

“In our view, the housing market hasn’t yet begun a real recovery,” Nishu Sood, a Deutsche Bank Securities Inc. analyst in New York, wrote in a May 21 report on homebuilders. “The economy, especially confidence and the job market, will be the primary determinant of housing’s recovery path.”

Michelle Meyer, an economist at Barclays Capital in New York, forecast a “feeble recovery” in a report on May 22.

“A recovery in home sales and a bottom in starts would be a major step in curbing the drag from housing,” Meyer wrote. “However, we do not foresee a return to a normal housing market for some time. The huge overhang in inventory, much of which is distressed, must be cleared. The will keep downward pressure on home prices.”

For Craig Mitchell in Boise, that means waiting for a buyer to come along. So far he’s had no offers for the 2,700-square- foot home near Boise’s Hillcrest Golf Course Country Club.

“I’ve been trying to hang on until either my business comes back or we can sell the house, but I think I’m down to another month, if I can sell the truck,” said Mitchell. “I haven’t paid a bill late in 25 years, and now it looks like I might lose everything, all because some Wall Street bankers got greedy.”

To contact the reporter on this story: Kathleen M. Howley in Boston at kmhowley@bloomberg.net.

Last Updated: May 26, 2009 09:22 EDT