It is unlikely home prices will drop as much as 17%, but analysts with Barclays Capital evaluated that possibility during a recent analysis of future home prices.
However, the firm noted such a decline is unlikely because the shadow inventory of 4 million to 7 million homes is still not as severe as some expect. The analysts generally use a 7% drop in prices nationwide as the base for their test scenario. BarCap said the market absorbs about 1.5 million homes through distressed liquidations annually.
“Given that most borrowers evicted in a foreclosure process have to go and live somewhere, it makes more sense to look at total excess supply of homes including owner and rental units,” the analysts wrote in a recent report. “Our estimate is that versus the historical norms, there are only a couple of million homes in excess housing inventory that need to be absorbed. Do not get us wrong — we are not presenting a bullish case for housing — all we are saying is that things are bad but not as bad as some might try to make us believe.”
Barclays bolstered its belief that home prices will not experience an extreme decline by saying “contrary to what many believe, the administration can and likely will do things to control a significant downward spiral in housing in the near term.”
If that does occur, Barclays said the move will lead to slower home price growth, while preventing another dip over the next two years.