Economists at Freddie Mac laid out several reasons for their belief that the direst views on how a seven-year run-up in home prices will end are probably overblown.
"In all cases, we find the predicted worst-case outcomes to be much less dire than 'doomsday' predictions reported in the mainstream press and elsewhere," Frank E. Nothaft, Freddie's chief economist, and Amy Crew Cutts, its deputy chief economist, wrote in a paper published Tuesday.
Also Tuesday, the government-sponsored enterprise surprised several analysts by reporting in its monthly volume summary that its mortgage portfolio shrank last month at the fastest rate this year. It also reported a low level of commitments for future purchases, as well as the first drop this year in its holdings of nonagency securities.
Mr. Nothaft and Ms. Cutts conducted four experiments to assess how home prices will change in the next five years. Their view: Price growth will slow to between 5% and 6% for the next several years.
Their paper was published in a quarterly newsletter from the mortgage data and analytics provider LoanPerformance, a San Francisco unit of First American Corp. of Santa Ana, Calif.
In the first experiment, they determined what it would take for the nationwide growth rate to return to a historical norm. To get the average annual rate from 1998 to 2010 to match the mean for the last 30 years (5%), prices would need to grow 0.9% a year over the next five years, the paper said. In this "very simple" exercise, values in the Pacific states and New England would fall 15% to 17%.
The economists then looked at expected changes in mortgage rates, populations, and income growth. Using this approach, they determined that the nationwide annual growth rate for the next five years would be 3.5%. The strongest growth would be in the Pacific states (5.1%), and the weakest would be in the Mountain and West South Central states (1.6%).
Next, the economists dealt with differences in home prices and rents. Mr. Nothaft said in an interview that the difference between growth in rents and home prices reverts to a historical mean over time, so the experiment was meant to dispel pessimists' worries that the fact the two rates have apparently gotten "out-of-whack" recently augurs for a crash.
The economists found that home prices in markets where they have risen faster than rents in the past seven years have simply been "catching up" after a previous lag.
The fourth experiment, which used a complex formula based on predicted macroeconomic fundamentals, determined that growth will fall next year to a 50-year mean of around 6% and hover there.
In the paper, Mr. Nothaft and Ms. Cutts remind prognosticators who expect a "bubble" to burst violently, because of the surge in prices, that sharp regional declines in the past were "not caused by the previous run-up in prices, but rather by the inability of hundreds of thousands of families to meet their mortgage obligations" as a result of layoffs and other regional economic woes.
A paper that Federal Deposit Insurance Corp. economists released in February and updated in May found only 17% of regional "booms" between 1978 and 1998 were followed by declines of at least 15% over the next five years.
However, the paper warned, "the expansion of subprime and high loan-to-value mortgages, along with growing use of home equity lines of credit, could change the dynamics."
In its monthly summary, Freddie said its mortgage portfolio shrank last month at an annual rate of 11%, to $678 billion. Many analysts had expected at least modest growth.
The GSE's holdings of nonagency mortgage securities dropped 1.4%, to $232 billion. That portfolio has grown by nearly a third this year. Freddie began breaking out such holdings in its monthly summary for March.
