Once they meet their quota, it is unclear how they will deal with delinquent loans on their books. "The disposition strategy of banks is material to the market," said Eddins. Even if the shift to short sales is permanent, home prices will "go up a step", but not as much as they would do in a healthy market, he says.
"Short sales is a preferred strategy for banks and borrowers," says Eddins. "But you are always going to have REO and a lot of it."
Home prices in cities such as Phoenix have risen more than 20% in the past year, largely on the back of a decline in distressed sales and heavy investor demand.
But Eddins is not convinced that markets in Phoenix and California are out of the woods. According to the analyst, these markets have not risen on the strength of demand from households. They had a good year but it could easily erode."I don't think housing will fall off a cliff but it can hit a new low," says Eddins. Radar Logic does not forecast prices but in Eddins estimate, he won't be surprised if home prices fall 5% to 10% in 2013 and that is not including a shock from the fiscal cliff. Even the optimists out there are quick to note that housing still has a long way to climb. "The sheer extent to which housing is now undervalued argues strongly that the next big move in prices is more likely to be upwards than downwards," says Capital Economics' Diggle. "But even in a scenario that saw prices rise by an average of 8% a year, while earnings growth averaged 4%, it would take until 2019 before housing returned to fair value." -- Written by Shanthi Bharatwaj in New York.