Nov. 4 (Bloomberg) -- The slump in U.S. housing prices is unlikely to end before the middle of next year, and statistics portraying rising values are misleading, according to Pacific Investment Management Co.

An S&P/Case-Shiller index for 20 metropolitan areas showed values rising 4.8 percent in the four months through August after a record 33 percent drop from its July 2006 peak. Such statistics are being distorted by U.S. efforts to reduce foreclosures, which are temporarily limiting sales of seized homes, said Scott Simon, Pimco’s mortgage-bond chief.

“It only makes prices look like they’re going up,” Simon said yesterday in a telephone interview. “Think about it this way: If you had 100 percent of the sales as foreclosure sales, prices would look like they went down a ton, and if you had none, prices would look like they went up a ton.”

Distressed sales fell to 29 percent of existing-home transactions in September, from more than half in March, as loan servicers assessed borrowers for the federal Making Home Affordable mortgage-modification program and dealt with state- law changes such as a California foreclosure moratorium, according to National Association of Realtors data.

Mortgage-bond analysts at firms including Barclays Capital Inc., Bank of America Corp. and Amherst Securities Group have also said home-price data is being distorted by changes in the types of sales, citing typical seasonal rises in non-foreclosure transactions as another cause. About 7 million properties likely to be seized by lenders have yet to hit the market, Amherst’s Laurie Goodman wrote in a Sept. 23 report.

High-End Pressure

“Lower-priced houses have probably bottomed, but expensive homes absolutely haven’t and they’re going to continue to go down,” Simon said.

Newport Beach, California-based Pimco is the world’s largest fixed-income manager, with $940 billion of assets.

About 25.3 percent of mortgages underlying the $1.7 trillion of U.S. home-loan securities without government backing were at least 60 days late, in foreclosure or already turned into seized property as of September bond reports, up from 20 percent in January, according to data compiled by Bloomberg. About 3.75 percent were 30 days late, up from a low this year of 3.57 percent in May and down from 4.18 percent in January.

Deteriorating Conditions

October disclosures for individual so-called non-agency bond deals -- typically released on the 25th of a month -- generally showed pipelines of defaulted loans building and early-stage delinquencies climbing, according to reports last week by Barclays, Credit Suisse Group and Morgan Stanley.

After a record rally from all-time lows, non-agency home- loan securities are “probably too expensive to buy giant amounts and probably too cheap to sell giant amounts,” Simon said. Still, “if the financial system is really repaired, these may be quite cheap assets.”

In May, Simon said the bonds were “still really cheap,” offering “awfully high yields” under “some pretty draconian scenarios” for home prices, after being “just stupidly cheap” months earlier.

Typical prices for the most-senior fixed-rate prime-jumbo mortgage bonds rose to 85 cents on the dollar last week, from 63 cents in mid-March, according to Barclays Capital data. Similar bonds backed by Alt-A loans with a few years of fixed rates were at 60 cents, up from 35 cents.

Non-agency home-loan securities lack guarantees from Fannie Mae and Freddie Mac, the government-supported mortgage-finance companies, or federal agency Ginnie Mae. Jumbo mortgages are larger than Fannie Mae and Freddie Mac can finance; Alt-A loans fall between prime and subprime in terms of projected defaults.

Index Effect

David Blitzer, chairman of the index committee at New York- based Standard & Poor’s, said in a telephone interview today that the mix of sales types does affect its Case-Shiller indexes. “Every month I get at least one realtor saying I shouldn’t include foreclosures,” he said, because they may overstate the extent of declines from the housing market’s peak.

The indexes give “a guide to what’s going on” and not “a razor-sharp result” for the exact needs of every investor, he said. Doing versions without foreclosures hasn’t been given serious consideration as “the data-compilation issues get to be pretty messy,” he said. “Should we have not included them in the first place? They’re part of the market” and excluding foreclosures would mean ignoring the “same houses that drove prices up sky high.”

Bill Bemis, a portfolio manager who oversees about $8.5 billion of securitized debt at Aviva Investors in Des Moines, Iowa, said in an interview yesterday that “in general, there’s still value left” in non-agency mortgage bonds.

‘Technical Tailwind’

While coming months will likely follow seasonal patterns and bring more delinquencies as well as weaker housing markets, “we’re not going to see any sort of increase like we saw” in late 2008 and early this year, he said. Prices may be supported by a “technical tailwind” of demand for mortgage debt fueled by government programs and low short-term rates.

“The real question,” Bemis added, “is when you get six to nine months out, and these technicals start to fade, have we reached a point where fundamentals have bottomed and are improving and can justify where prices have gotten to?”

To contact the reporter on this story: Jody Shenn in New York at jshenn@bloomberg.net.

Last Updated: November 4, 2009 12:30 EST