Moody’s Investors Service says it expects home price appreciation to be “soft” for the next couple of years. The company says there were 1.8 million more vacant homes sitting on the market than what is considered the norm

at the end of the second quarter. According to Moody’s, this imbalance of supply-and-demand, particularly in light of the steep falloff in home sales post-tax credit, means the home price correction is not yet over.

The credit ratings agency explained that the increase in excess housing supply reflects the rise in homes that lenders are repossessing now that many of the distressed borrowers who failed to qualify for the Home Affordable Modification Program (HAMP) or an alternate modification are going through the foreclosure process.

Repossessions by banks hit a record high in the first half of this year, according to data from RealtyTrac. Many of these homes are ending up in the tally of excess housing stock, and Moody’s says as lenders push these units off their balance sheets, house prices will fall.

“The increase in excess supply indicates that the market still has a substantial number of unwanted homes to work

through…. Indeed, it will not be until 2012 that demand and supply conditions are balanced enough to drive price appreciation that matches the pace of inflation,” Moody’s said in a research note released Monday.

Based on Moody’s estimates of Census data, the share of vacant homes averaged 6 percent of total housing stock over the past 20 years. The number of empty homes reached a record 7.7 percent reached in the second quarter, which implies the 1.8 million unit excess, the ratings agency explained.

That’s up from the first quarter’s 1.7 million estimated excess. According to Celia Chen, senior director for Moody’s Economy.com, the increase is “small, but disturbing and suggests that the market still has much healing to do.”

Moody’s cautions that it will take some time to work through the excess housing – a weak job recovery and tight underwriting standards, combined with the large number of households with impaired credit, will constrain the demand for owning a home. Nonetheless, the company’s analysts say the imbalance will self-correct.

“Under our baseline outlook of an economy that recovers weakly over the next several quarters, the demand for homeownership will increase as more jobs help more people move into their own homes. Concurrently, the homebuilding industry will continue to put up homes at a below trend pace, constrained by financing difficulties. These forces will help soak up excess housing units by the end of 2012,” Moody’s said.

In the meantime, the ratings agency says the lingering excess supply will weigh on house price appreciation until supply and demand conditions are better balanced. Moody’s expects the national house price index to bottom early next year, but price appreciation to remain weak for the next couple of years.

http://www.dsnews.com/articles/housing-supply-demand-wont-balance-until-2012-moodys-2010-08-30