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Fitch: Price Growth Not Driven by Fundamentals

January 7, 2013

Fitch: Price Growth Not Driven by Fundamentals

Despite the steady increase in home prices in 2012, Fitch Ratings says it “remains cautious” in its outlook on home values.

According to a report from the ratings agency, home prices have risen “at their greatest pace since 2005,” but in certain markets, technical factors rather than “fundamentals” acted as the driving force behind the price gains over the past few quarters.

Fitch explained technical factors such as low mortgage rates, the tight supply of existing homes for sale, and weak levels of new home construction are leading to affordability and driving demand while “offsetting weak fundamentals.” Weak fundamentals include issues such as unemployment and unimpressive wage growth.

In addition, Fitch stated it believes price movement is “highly dependent on the pace of distressed sales and liquidations.”

For example, states such as Michigan, Arizona, and Georgia have been able to dispose of their distressed inventory quickly and have also seen “both steeper drops and quicker stabilization,” according to Fitch.

On the other hand, states with long foreclosure timelines—New York, New Jersey, and Connecticut—may see price declines.

According to the report, Arizona currently liquidates nearly twice as many mortgages per month compared to New York and New Jersey combined.

In order to determine sustainability, Fitch conducted an analysis using its Sustainable Home Price (SHP) model. The ratings agency found 22 metros out of 41 are currently “undervalued” or “sustainable,” while five were categorized as “overvalued” by 5 to 10 percent. In 2010, 23 metro areas were overvalued by 10 to 25 percent.

The report highlighted hardest hit metros such as Phoenix, Atlanta, and Riverside, noting they are now beginning to recover and are currently considered “undervalued.”

New York and New Jersey, though, were categorized as overvalued by 10 percent to 15 percent, hindered by their large inventory of distressed properties and long foreclosure timelines, according to Fitch. And, high unemployment could hurt Los Angeles and Union, New Jersey and lead to a roughly 10 percent decline.

On a national level, Fitch admitted it holds a more somber view of prices and says price growth “is likely to be muted or even modestly negative in the near-term as liquidation volumes increase and expand supply, particularly in the lengthy judicial states where inventory has been off the market.”

Fitch warned “short-term price movements can be misleading when the impact of distressed properties has been withheld from the market.”

If liquidations continue at their current pace, Fitch estimated it would take 34 months to clear out the inventory of serious delinquencies, down from 44 months a year ago.

“While positive, the improvement masks those markets with disproportionately large inventories that have yet to be cleared and where double-digit price declines are projected,” the report noted.

In New York and New Jersey, it would take 10 years to clear out serious delinquencies, or loans 90 days or more past due, according to Fitch.

Fitch: Price Growth Not Driven by Fundamentals.

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