[Goldman Sachs] US Economics Analyst Issue No: 08/15 April 11, 2008 US Economic Research Group
Taking Stock of the Home Price Downturn
* We estimate that falling house prices and lower interest rates have eliminated slightly more than half of the 2006 housing market overvaluation. If prices fall another 10% from their (estimated) 2008Q1 level, as we expect, the resulting 25% peak-to-trough decline would bring standard valuation measures roughly back into line with pre-bubble norms.
* Our forecast is a bit less dire than what is now implied by the home price derivatives market, which appears to discount some degree of undershooting relative to ìfair value.î It is possible to rationalize the marketís more pessimistic forecast by sky- high home inventory and vacancy data, and by the expectation of further large- scale foreclosures which could lead to even more excess supply.
* But there are also some glimmers of hope. First, single-family housing starts built for sale have now finally fallen meaningfully below new home sales, a sign that the homebuilders are finally capitulating. Second, more aggressive government policy could limit the rise in foreclosure supply.