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Analysis of Projected Home Prices: The Underlying Supply & Demand Forces

Our mortgage strategists expect approximately 6 mn additional foreclosures to enter the market for resale over the next three years. It will then take a few years for the pace of foreclosures to gradually normalize to about 200,000 a year. If we plug in our baseline forecast for household formation (as explained above) and assumptions for the remaining variables (as explained in the footnote), we can run a few scenarios for the amount of time it will take to clear the imbalance under different paths of housing starts. At one extreme, if housing starts fall to zero, translating to zero completions next year, the excess supply will be cleared by early 2013. At the other extreme, if housing starts surge back to the historical norm of 1.5 mn next year and hold indefinitely, there would be another 2 mn homes added to the excess, bringing the total to 4mn, which would take until 2027 to offset. We believe the truth falls somewhere between these two extreme scenarios.

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