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Seattle Homes Currently “Significantly Overvalued” - Some Analysts Predict Further Price Drop of up to 20%

- Wednesday, September 15, 2010

Just how far home prices could drop is anyone’s guess. But, according to a report by Moody’s Analytics, Seattle is one market that still remains overvalued.

Moody’s is a credit-rating agency that provides financial analysis and evaluates the credit-worthiness of borrowers. In recent weeks, they have downgraded the ratings of numerous mortgage-backed securities (MBS) because of the continually worsening performance of the underlying mortgage pools.

Giving reasons for the down-grading, Moody’s notes “uncertainty in the current macroeconomic environment, in which unemployment remains at high levels, and weakness [that] persists in the housing market.” Moody’s assumes that housing prices will deflate by a “baseline” of about 5%, with stabilization in 2011. However, they caution that this economic uncertainty increases the potential for a double-dip recession - which could result in a further decline in home prices by up to 20%.

CEO of Kondaur Capital Corp. (a distressed loan purchaser), Jon Daurio, told The Housing Wire that he agreed with Moody’s take, citing the possibility of worsening unemployment figures and the failure of the HAMP program as contributing factors. However, Daurio noted that some communities might be immune to the drop, or even experience price appreciation. While many markets have already seen large price drops, Seattle is one city that Moody’s (as cited in the WSJ) considers to remain “significantly overvalued.”

With foreclosures increasing, and foreclosure starts back on the increase after nearly a year of declines, the banks themselves hold an inordinate amount of power in influencing home prices.

Foreclosure statistics, by quarter

(Chart from FHFA second quarter report, 2010)

While homeowners may be reluctant to drop their prices for a quick sale, banks have a greater incentive to rid themselves of property quickly, and so are more likely to slash prices on foreclosed homes. As more homes fall under foreclosure, rising supply coupled with decreasing demand could see home prices plummet. In places where the market has already dropped substantially, prices have less distance to fall. But in markets that are considered to be overvalued, such as Seattle, the effect could be felt more strongly.

Seattle Short Sales, Inc. encourages homeowners to assess their situation with an attorney, a CPA, or a financial planner, to determine whether it makes sense to continue making payments on a mortgage that is significantly underwater.

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