U.S. house prices overall will hit bottom by year's end, after suffering a 36% drop in Fiserv Lending Solutions’ Case-Shiller® price index since their 2006 peak, according to a new study from Moody’s Economy.com. The study provides detailed housing market forecasts for 381 metro areas across the U.S.

"Notwithstanding the intensifying economic gloom, the bottom of the housing downturn is within sight for the nation," said Mark Zandi, chief economist of Moody’s Economy.com. "Presuming we see strong action by policymakers to help support the economy and the housing market, prices will begin to recover by the end of this year."

More than three years after the market began correcting, inventories are flattening, prices are coming back down to earth, and sales are approaching stability. House prices nationwide have already fallen by about 25% since their 2006 peak.

But despite some early signs of improving sales and optimism that new policy measures will help to put a floor under the housing market, the study predicts prices will fall another 11% on average before stabilizing.

"Policymakers have not yet been able to break the downward spiral that has developed among the sinking housing market, job losses, frozen credit markets, and rising foreclosures," Zandi said.

The study predicts that by the time the market correction is complete, it will have been widespread and severe, with 62% of the nation’s 381 metro areas seeing double-digit, peak-to-trough declines in house prices. Declines will exceed 20% in about 100 metro areas. The hardest-hit regions, such as Southeast Florida, California's Central Valley, and the Riverside, CA metro area, are expected to decline by upward of 50%. In only about 42 markets, mostly smaller cities in the South, house prices will fall by less than 1%.

Even if the recession ends late this year, as expected, the subsequent recovery looks to be lackluster. Real GDP is not expected to return to its prerecession peak until late 2010, and the nation will not approach a full-employment jobless rate of 5% before President Obama's term nears its conclusion in 2012. A number of uncertainties in both the housing and economic outlooks remain, and the risks tilt to the downside.

Moody's Economy.com has updated its forecasting model with information on metro area mortgage defaults. Normally, defaults and foreclosures have little impact on prices. However, the volume of foreclosures is so large that they are an important driver of falling house prices. The model is based on statistically estimating the historical relationships between economic, demographic, financial and housing-related variables. House price forecasts are produced by extrapolating these relationships into the future. In addition to the default data, a wide range of variables are accounted for, from mortgage rates and mortgage lending conditions to demographic trends and job market conditions.