Fitch Ratings says it expects real U.S. residential real estate prices to decline by 7.8%, down from last quarter's 9.1% expectation.
With annual inflation running close to 3% and an economic recovery taking hold, Fitch expects home prices to touch bottom in late 2013 and then begin a slow recovery. But underemployment, tight lending practices, and the large delinquent inventory of homes remain the biggest risks to all of these trends.
‘The slow and steady recovery in the economy and some increasingly positive indicators underpin this view,’ says the rating agency. ‘Currently, we believe that 12 states are undervalued and 14 have prices in a sustainable range. For instance, the drastic declines of the last few years in Arizona appear to be over. However, some drops remain likely. Prices are beginning to fall in New York and New Jersey, which have performed better than most due to a large backlog of inventory, which has begun to liquidate.’
Fitch adds that professional investors are beginning to notice these trends.
‘Since the beginning of the year, various small- to mid-sized private equity firms have bought homes in tight geographic areas with the intention of renting them,’ Fitch continues. ‘Earlier this month, a home builder and one of the largest private equity firms agreed to form a REIT that will exclusively buy and rent single-family homes. In the securitization market, others have also built and offered distressed residential mortgage-backed funds. Notably, large firms have recently begun allocating capital to distressed mortgage bonds.’