House prices across 25 metropolitan statistical areas (MSAs) rose 1% in April compared to one month earlier, and 2.4% compared to a year earlier, according to the latest from Radar Logic. An oversupply of housing and wave of distressed inventory, however, could drag down house prices later this year. Prices in the Midwest MSAs led overall monthly gains, rising 3.5% from March, although they are down 8.8% from a year earlier. Prices in the western MSAs grew 1% from a month ago and 7.5% from a year ago. Although prices show recent upward trends, Radar Logic warned that housing oversupply represents a major source of distress for the housing market. Prices started stabilizing at the beginning of 2009 due to a pickup in demand as house prices were declining from relative highs. But Radar Logic noted that demand could reach “exhaustion” soon. And the inventory overhang of distressed and non-distressed homes is affecting prospective homebuyers’ hopes for future appreciation. “Given the unprecedented number of homes in default, foreclosure, or REO inventory, and barring some unforeseen exogenous boost to housing demand, the price stability we saw in 2009 will likely come to an end in the second half of this year,” Radar Logic said. Radar Logic noted the volume of houses in real estate owned (REO) status or a state of serious delinquency is steadily rising. The national REO inventory is more than 478,000 homes. Of that total, Fannie Mae (FNM) owns 23%, Freddie Mac (FRE) owns 11% and the Department of Housing and Urban Development (HUD) owns 10%. Radar Logic estimates another 1 to 2% is owned by the Department of Veterans Affairs (VA). All together, the government owns about 46% of the total REO inventory. After adding in seriously delinquent mortgages, Radar Logic estimated 3.1m homes either in the government’s REO inventory or headed toward it. With an assumed average mortgage balance of $200,000, the value of these distressed assets could reach $614bn: Since REO inventory, by nature of being distressed, tends to sell at a discount, the government (read: taxpayers) are on the line to lose billions. Radar Logic estimated that, at an average REO liquidation rate 40% lower than book value, taxpayers could lose $246bn. Assuming another 25% of the government’s distressed pipeline ends up in short sale — at an average 40% discount — Radar Logic noted taxpayers could lose an additional $88bn on the assets. Taken together, REO and short sales could cost the government $333bn. Write to Diana Golobay. Disclosure: the author holds no relevant investments.