Double-Dip Recession Threatens to Shave 20% off Home Prices: Moody’s

Tue, Aug 10, 2010


By: Carrie Bay

Could the U.S. economy slip back into the throes of the recession that nearly crippled the nation’s financial system and protracted any semblance of a housing recovery? The analysts at Moody’s Investors Service think so.

“The risk of a double-dip recession is rising. We believe the odds of a near-term double dip recession have increased from nearly one in five this spring to closer to one in four,” they wrote in a research report released Monday.

And they warn that if the economy sinks back into recession, housing activity will follow. If such a scenario were to play out, Moody’s says home prices are likely to fall by another 20 percent before they stabilize in early 2012 – a full year later than the company’s baseline outlook of a 5 percent drop before leveling off in early 2011.

Moody’s says the economic recovery is losing momentum with retail, housing, manufacturing, and most importantly the job market having weakened in recent weeks. Real GDP, which grew 5 percent annualized during the fourth quarter of 2009, has slowed to half that pace in the second quarter of this year, the ratings firm explained.

“This rate is below the economy’s potential, and we expect unemployment to drift back up into the double digits,” Moody’s said in its report.

All this contraction bodes badly for housing markets, where oversupply and muted demand have home prices fettered, and weak economic conditions, especially rising unemployment, are making it harder and harder for borrowers to keep up with their mortgage payments.

Moody’s says foreclosures pose a major downside risk, with another vicious spiral of defaults and property repossessions a possibility.

The company’s analysts say the success of the Home Affordable Modification Program (HAMP) is vital to squashing this possibility, but it has been progressing slowly and a number of borrowers are simply too deeply troubled to benefit from a loan modification.

If the recent revisions to HAMP – including principal-reducing modifications and forbearance for unemployed homeowners – do not produce more substantial results, Moody’s says foreclosures will exceed already-elevated projections, leading to an even sharper drop in home prices.

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