AEI: House Price Declines Will Stay Small

Despite the record number of foreclosures, housing price declines have been small and will remain so, according to a new paper released by the American Enterprise Institute. Cushioned by such other "fundamental factors" as employment growth and reductions in the housing supply, prices on average will slide by only 4.5% under the study's worst-case scenario, said co-author Charles Calomiris, a professor at Columbia University and a visiting scholar at the conservative think tank. Only 11 states will see prices drop by more than 6% by the end of 2009, he predicted. "Foreclosures and home prices have negative effects on each other over time, but this does not imply a vicious cycle of housing price collapse," Mr. Calomiris said. The paper bases its findings on house-price data compiled by the Office of Federal Housing Enterprise Oversight, maintaining that the more popular S&P/Case-Shiller index is prejudiced toward markets more susceptible to price swings. But Mark Zandi of Moody's Economy.com said it is the OFHEO numbers that are defective because, among other things, they don't include foreclosure sales. Mr. Zandi said 25% of all sales in the first quarter were distress sales, many at 50 cents on the dollar. And with 8.5 million homeowners now owing more than what their properties are worth, the economist warned that the foreclosure problem will get much worse before it gets better.