Fitch Ratings says that it sees another 10% of downside to U.S. house prices, but that the correction is 75% complete.

The rate of U.S. home price declines will slow in the coming months, it predicts. So far, national home prices have declined by 22%, it reports. Fitch’s peak to trough expectation is for prices to decline by 30% from the peak price achieved in 2006. Fitch’s forecast is primarily based on its expectation that home prices will return closer to the long-term historical mean, which has been the pattern of prior home price cycles.

The additional 8% decline represents a 10% decline from today’s levels. Fitch thinks that most of this correction will be incurred in the next several quarters, with prices exhibiting more stability in 2010.

Most of the price declines expected have occurred, the firm notes. Fitch’s analysis shows that the 29% rise in prices realized between 2004 and 2006, representing one of the largest price growth periods ever recorded, has been reversed. With prices returning to early 2004 levels, Fitch believes that most of the additional 10% decline, which will bring prices back to levels seen in 2003, will occur over the next 18 months. It then expects declines to moderate.

While the worst of the correction appears to be over, group managing director and U.S. RMBS group head Huxley Somerville said that many factors can impact the timing and amount of further declines. “Should economic conditions become much worse than expected, home prices would decline more than Fitch’s projection and price stabilization would be delayed,” said Somerville. “Higher mortgage rates and tighter underwriting also will continue to put downward pressure on prices.”

“Alternatively, government programs such as the U.S. Treasury’s Trouble Asset Relief Program and expanded mandates for Fannie Mae, Freddie Mac and Federal Housing Administration to increase loan purchases and originations may facilitate liquidity in the housing markets, which could have a positive impact on prices,” said senior director Suzanne Mistretta.

IE