U.S. Home Prices May Fall 11% This Year, Morgan Stanley Says

U.S. home prices will fall 6 percent to 11 percent this year, more than previously forecast, as mortgages become harder to obtain and distressed sales drive down values, according to Morgan Stanley.

Prices will have lost as much as 39 percent from their 2006 peak through the first half of 2012, according to measures such as the S&P/Case-Shiller index, analysts Oliver Chang in San Francisco and Vishwanath Tirupattur and James Egan in New York said today in a report. Morgan Stanley previously estimated values would drop 35 percent from the peak.

“We revised our outlook lower for two key reasons,” Chang wrote in an e-mail today. “First, home prices have fallen more than we expected since our last published forecast in early December 2010, and second, sales activity has remained weak, especially for mortgage-dependent transactions, which are needed to support the non-distressed market.”

Home values are dropping as foreclosures, which sell at a discount, undermine real estate prices. Distressed properties, including foreclosures and short sales, made up 40 percent of existing home purchases in March, the National Association of Realtors said April 20. Short sales occur when a lender agrees to sell for less than the mortgage balance.


The S&P/Case-Shiller index of 20 U.S. cities will probably show tomorrow that prices fell 3.3 percent in February from a year earlier, according to the median estimate of 23 analysts in a Bloomberg survey. The measure was down 32 percent in January from its July 2006 peak.

The Morgan Stanley forecast calls for a bigger drop than other projections. David Wyss and Beth Ann Bovino of Standard & Poor’s said April 8 that home prices will fall another 4 percent and bottom out in the second quarter of this year. The Case-Shiller index will decrease 5 percent this year and hit bottom by the third quarter, Celia Chen of Moody’s Analytics Inc. said in a March report.

“Our view is we’ll see a 5 percent drop in national home prices this year,” Michelle Meyer, a senior economist at Bank of America Merrill Lynch Global Research in New York, said during an April 20 interview on Bloomberg Television. “It could be larger. What dictates that forecast is the share of distressed properties.”

Uncertainty about home-financing and foreclosure regulations are also weighing on values, the Morgan Stanley analysts said. Lenders are tightening standards in the face of proposals to reform Fannie Mae and Freddie Mac; requirements under Dodd-Frank legislation that they retain a percentage of mortgages; and negotiations with state attorneys general to settle foreclosure disputes, according to the report.