Has Government Intervention Stalled Home Price Declines?

Some housing analysts have made the case that home prices have stabilized in recent months, in part, because foreclosure moratoria earlier this year helped to limit the supply of homes coming on the market during the spring and summer—just as the policymakers simultaneously goosed demand by lowering mortgage rates and offering a tax credit to first-time home buyers.

That raises some big questions: What happens when those new foreclosures accelerate later this year, and more supply hits the market? Will prices decline further if those demand-side incentives run their course? Have government efforts simply hit the pause button on the housing market downturn?


The answers to those questions produce different estimates about how much further the housing market has to fall, and a new forecast from Lazard Asset Management offers several different scenarios. The most probable scenario forecasts that home prices have another 10-15% decline from the current level, though prices are expected to rise slightly through the end of the summer as government intervention helps boost the housing market.

But Lazard also offers two additional scenarios: a “bull” market forecast that predicts an 8% home price decline from May, and a “bear” market scenario that forecasts a 19% price decline from the first quarter of 2009.

“Even in our bear case, it is clear that the government intervention to increase affordability and demand through lower mortgage rates, and to decrease supply through foreclosure moratoria and modifications, are having a positive impact on house prices relative to what would have occurred in the short term,” writes Ronald Temple, portfolio manager and co-director of research at Lazard Asset Management. ”The key question is how sustainable the benefits of such intervention will be.”

Even if government efforts simply delay an onslaught of new bank-owned supply of homes, the government’s attempt to kick the supply can down the road could have a positive benefit–provided that the economy is in better shape and consumer confidence has improved when that supply becomes available, there could be more buyers ready to soak up the inventory.

Also, various moratoria and foreclosure modification programs have increased the average time it takes for a lender to move a home from foreclosure to sale to around 11 months (and longer in some states, such as Florida and New York), according to Lazard. That means that homes slated for foreclosure last November might not sell until later this year or early 2010, providing some tailwinds for home prices through next year.