Mark Zandi, chief economist at Moody's Economy.com in West Chester, Pennsylvania, said in an interview with Reuters home prices will resume their decline by early next year as foreclosure sales pick up again.

“The housing crash is not over,” he said.

The US housing market has suffered the worst downturn since the Great Depression, and its impact has rippled through the recession-hit economy as well as the rest of the world.

A setback for the hard-hit housing market could portend problems for the US economy.

Home prices, as measured by the Standard & Poor's/Case-Shiller US.National Home Price Index, will trough in the third quarter of 2010 after declining 38%, Zandi said.

The index peaked in the second quarter of 2006 and hit a trough in the first quarter of 2009, a drop of about 32%.

Home prices in many regions have been rising. That is because foreclosure sales fell over the summer and fall as mortgage servicers have tried to put stressed homeowners into the Home Affordable Modification Program and other modification plans, he said.

“This lull in foreclosures sales has resulted in the price gains in the past few months,” he said.

“Foreclosure sales will increase, and home prices will resume their decline by early 2010 as mortgage servicers figure out who will not qualify for a modification,” he said.

Zandi said 7.5 million foreclosure sales will have taken place between 2006 and 2011. The majority of these sales, however, have not emerged yet, with 4.8 million foreclosure sales expected between 2009 and 2011.

Attractive rates and high affordability have been positives for the US housing market, which has been showing signs of stabilization. Sales have surged in recent months as buyers scrambled to take advantage of the government's first-time home buyer tax credit, which was originally set to end November 30.

Last month the Obama administration extended the $8,000 first-time home buyer tax credit, added a $6,500 credit for home owners buying a new residence, and increased income limits. Eligible borrowers must sign contracts by April 30 and close loans by June 30.

Zandi said another significant obstacle to a housing market recovery is the number of mortgages that are “underwater,” where borrowers owe more for the loan than the residence is worth. This negative equity disqualifies many homeowners from refinancing and prevents some from selling their homes.

Borrowers in negative equity are also more prone to defaults and foreclosures.

Zandi said about 25% of single-family homes with mortgages have negative equity.

“With so many homeowners so deeply underwater and unemployment very high and on the rise, the foreclosure crisis will continue putting more pressure on home prices,” he said.

The US Labor Department said the unemployment rate reached a 26-1/2-year high of 10.2% in October. November's unemployment rate in November will be announced on Friday.

“Our house price outlook is dependent on two other key assumptions, including a more stable job market by early 2010 and that interest rates on fixed-rate mortgages remain well below 6% throughout the year,” he said.

The unemployment rate will peak at 10.7% in the third quarter of 2010, Zandi forecast. (Reuters)