Barclays: Government Modification Programs Worked

The government’s programs to modify mortgages, along with private efforts in that area, had the effect of stabilizing home prices by delaying foreclosures and preventing a glut of distressed homes coming on to the market, according to a report from Barclays U.S. Residential Credit Strategy Team.

They expect an average of 110,000 distressed home sales per month for the next several years, which should keep the market share elevated.

The report also states that they believe that HARP-like proposals for nonagency mortgages remains unlikely due to the possible cost to taxpayers, but if such programs were to be enacted they would “provide meaningful upside.”

However, the analysts declare “shadow inventory is not the same thing as excess supply—we believe that in the longer term, housing is driven by excess supply.”

Looking back, Barclays believes that that home prices hit what it termed “a sustainable bottom” in the first quarter of last year. But prices over the next few years are expected to recover slowly. The analysts predict that it will take until May 2020 for prices to regain their 2006 peaks.

According to Barclays, excess supply of properties was at 2.3 million units as of September 2012. It thinks it could take two or three years to clear the excess supply, but it offers a caveat. New household formation is strong at 1.1 million and their housing needs could lead to faster absorption.

Barclays is more bullish on the future of the housing market than Robert Shiller. The analysts say, “The risk that home prices fall dramatically from here remains low. Long-run measures suggest that home prices are close to equilibrium. The government will intervene if prices fall further, other factors will keep timelines long.”

But they add the market is still vulnerable to shocks like the financial problems in Europe or the fiscal cliff here. If the mortgage interest deduction is removed from the U.S. tax code, it could affect home prices but more likely just higher-priced ones.