HOUSING FORECAST CALLS FOR MORE PAIN THROUGH 2015 SAY EXPERTS, A SECOND REAL ESTATE BUBBLE MORE LIKELY

Prices to Stumble Through 2015, Economists Say, Weighing Down Recovery

Economists, builders and mortgage analysts are predicting the weakened U.S. economy will depress housing prices for years, restraining consumer spending, pushing more homeowners into foreclosure and clouding prospects for a sustained recovery.

Home prices are expected to drop 2.5% this year and rise just 1.1% annually through 2015, according to a recent survey of more than 100 economists to be released Wednesday. Prices have already fallen 31.6% from their 2005 peak, as measured by the Standard & Poor's Case-Shiller 20-city index.

 

WSJ's Nick Timiraos reports on a new survey of economists stating that the housing market is likely is likely to remain under pressure through 2015. Photo by Scott Olson/Getty Images

If the economists' forecast is accurate, it means housing faces a lost decade in which home prices recover just a fraction of what was lost between 2005 and 2015, leaving millions of homeowners with little, if any, equity in their homes. The survey was conducted for MacroMarkets LLC, a financial technology company co-founded by Yale University economist Robert Shiller.

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The housing bust has chilled consumer spending—the largest single driver of the U.S. economy—with eroding home equity contributing to the so-called reverse wealth effect that prompts people to spend cautiously because they feel poorer.

One in five Americans with a mortgage owes more than their home is worth, and $7 trillion of homeowners' equity has been lost in the bust. Homeowners' equity as a share of home values has fallen to 38.6% from 59.7% in 2005.

"With all of the economic turmoil, both domestic and international, there's not much that points to an improving housing market at any point in the near future," said Ara Hovnanian, chief executive of Hovnanian Enterprises Inc., the U.S.'s seventh-largest builder by deliveries.

While home prices aren't falling at anywhere near the pace of 2008, one worry is that even modest declines become self-reinforcing, pushing more homeowners underwater and exacerbating the downdraft caused by more foreclosures.

That, in turn, could prompt more credit tightening by lenders, further shrinking the pool of home buyers when more are needed to purchase bank-owned foreclosures.

The housing bust is weighing on the economy in part because bank-owned foreclosures have sidelined new construction, a traditional employment engine following a downturn.

The Commerce Department said Tuesday that single-family housing starts fell by 1.4% in August from July to a seasonally adjusted annual rate of 417,000.

Over the past 35 years, housing has contributed just 0.03 percentage point to annual growth in gross domestic product, according to research from the Federal Reserve Bank of St. Louis. But in the two years following most recessions, housing adds around 0.5 percentage point.

Recently, that contribution has been negative. The housing market needs the economy to add jobs, but the economy isn't able to rely on the job boost housing normally provides in a recovery. "We're in uncharted territory," said David Rosenberg, chief economist at Gluskin Sheff.

The fallout from the housing bust hasn't been easy on Greg Rubin, owner of California's Own Native Landscape Design, a landscape contractor in Escondido, Calif.

With sales down by half from 2007, Mr. Rubin has reduced his work force to nine people from 21. He now does jobs for as little as $4,000 versus no less than $10,000 in the past.

With home values no longer increasing, the few people who are hiring Mr. Rubin are paying with cash savings instead of home-equity loans, substantially decreasing their purchasing power.

Also, Mr. Rubin said, home prices have been battered for so long that many people have stopped believing home improvements will increase the value of their property.

"There's this psychology that home prices are dropping independent of whatever improvements they make, so it's a lost cause to do them now," he said.

Rising home prices traditionally lead homeowners to spend more money, even during periods of economic sluggishness, creating jobs.

But "that cycle can cut the other way," said James Parrott, a top White House housing adviser. "As the value of a family's home drops, that can really go from a lever of savings to a drain on that savings."

Those concerns prompted the White House earlier this year to begin canvassing experts on how to attack the excess inventory of distressed properties and troubled mortgages.

Officials are studying ways to encourage banks to write down loan balances for borrowers that are seriously underwater and to allow more underwater borrowers with government-backed loans to take advantage of low mortgage rates by refinancing. They are also working with federal regulators to study ways to rent out or clear the inventory of foreclosed homes.

Earlier initiatives encouraging banks to voluntarily modify mortgages haven't reached as many borrowers as hoped, hindered in part by stubbornly high unemployment.

Banks hold nearly 500,000 homes on their books, but more than four million additional loans are in some stage of foreclosure or are considered "seriously delinquent" because they have missed three or more payments.

That bad debt is "dragging the nation's economy underwater," said Lewis Ranieri, the pioneer of the mortgage-bond market, in a speech warning of the growing risks of policy inaction at a conference Monday. "In truth, we seem very paralyzed and slow to act," he said, chiding policy makers and industry executives for "wasting time engaging in self-interested bickering" while the housing market rots.

While mortgage rates have fallen to their lowest levels in decades, applications for home-purchase mortgages are mired near 15-year lows, according to the Mortgage Bankers Association. Applicants today face "a mountain of paperwork and never-ending reverifications," said Stuart Miller, chief executive of home builder Lennar Corp., in an earnings call Monday. Financing remains available to only "the most credit-worthy purchasers," he said.

Mortgage-finance giants Fannie Mae and Freddie Mac sharply tightened their standards three years ago, and many banks continue to do so because of concerns they will be forced to buy back defaulted mortgages.

The bust has hit some markets harder than others. In Nevada, Arizona and Florida, many homeowners can't move to take new jobs because they owe far more than their homes are worth. But even some markets that have shown resilience over the past year, such as Washington, D.C., could be at risk if job growth peters out.

Housing markets are also in bad shape because would-be first-time homeowners have retreated amid grim economic news. Many current homeowners, meanwhile, don't have enough equity to move, chilling the crucial "trade-up" market. That has left housing heavily dependent on investors buying homes at discounts with cash.

COMMENTARY:    

The Real Estate Bubble of 2011

I first predicted a a second real estate bubble to occur in mid-2010, but an $8,000 credit for first-time home buyers increased demand just enough to keep the bubble from occurring. Towards the end of 2010, the banks got into trouble with the regulators because they "robosigned" foreclosure documents and could not prove that they actually owned the deed on the foreclosed property. This situation happened because at the height of the housing boom, the banks packaged loans into mortgaged-backed securities and them sold them to other financial institutions.  In some cases those securities were resold a second or third time.  As a consequence banks slowed down foreclosures until they could get their paper trail straight.  In other cases, banks worked out loan modifications with homeowners in order to avoid foreclosure.  A lot of those loans are now past due again, and this will result in a second series of foreclosures.  From what I have been reading, foreclosures are now in full swing again and many housing experts are predicting another huge increase in foreclosures during 2011.  

The Root Causes of High Unemployment

In a blog post dated July 10, 2011, one of my most detailed and comprehensive analysis of the root causes behind today's high unemployment rate, I came to the inescapable conclusion (as have many economists) that high unemployment will continue to plague the nation for several years, and that as a result, overall economic conditions are not likely to improve sufficiently to spur a resurgence of new housing starts and resales of existing housing units simply are not there. In the past, when we had previous recessions, the unemployment rate increased, but within six to nine months, employment rebounded.  This is no longer the case.  There are three job destruction forces that will continue to keep unemployment rates high.  

• Computerization - Resulting from faster computers, the internet, software productivity tools and applications.  In many cases, one worker can do the work of two.
• Globalization - This the result of a collapse of the manufacturing sector (over 57,000 factories have closed since 1998) during the Great Recession, destruction of the manufacturing sector due to outsourcing jobs overseas in order to lower production costs and remain competititve in the marketplace, creation of new  businesses dedicated solely to outsourcing jobs, and corporations are now highy motivated to improve earnings by not hiring full-time workers, but relying on temporary or part-time workers.  Corporations are also employing selective discrimination, a practice where they won't hire people of a certain age or those who have been unemployed for a long time. 
• Industry Consolidation - Big companies began merging in earnest during the Reagan administration, and by the early 2000's it was common for three or four firms to control upwards of half or more of entire sectors.  It happened in banking, retail, transportation, pharmaceuticals, medical and health, broadcasting and automobile industries, accounting, and advertising, just to name a few.

In the interim, home buyers are standing on the sidelines, waiting for a "bottom" to occur in the housing market, preferring to paydown their debt, and are not willing to take on any new debt. 

The Shadow Inventory

In a blog post dated December 28, 2010, I predicted a second real estate bubble to occur in 2011, and this now appars to be happening.  The key reason:  The inventory of available housing units needs to be reduced substantially before a full recovery can begin.  

According to CoreLogic, the visible supply of unsold inventory was 4.2 million units in August 2010, the same as the previous year. The visible inventory measures the unsold inventory of new and existing homes that were on the market. The visible months’ supply increased to 15 months in August, up from 11 months a year earlier due to the decline in sales during the last few months.

On November 22, 2010, CoreLogic, a leading provider of consumer, financial and property information and business services, reported that the shadow inventory of residential property as of August 2010, reached 2.1 million units, or eight months worth of supply, up from 1.9 million, or a five-months’ supply, from one year earlier. 

The total visible and shadow inventory was 6.3 million units in August, up from 6.1 million a year ago. The total months’ supply of unsold homes was 23 months in August, up from 17 months a year ago.

Banks Tighten Lending Requirements

Banks are also making it a lot more difficult for home buyers by tightening credit requirements, including higher loan-to-value requirements, and restricting financing to owner-occupied housing units.  The days of flipping real estate properties to make a quick profit, are long gone.  I know a few of you will argue this point with me, but I will call you out on it.  Show me you have bought, fixed up and sold at least four houses in 2011.  You can't can you? 

Political Gridlock

Continue gridlock in Congress is something we do not need during times like this. Political parties are content to fight among themselves instead of doing what is right for the people This creates nothing but uncertainty in the financial markets.  Banks are not going to lend when this situation continues. 

Courtesy of an article dated September 21, 2011 appearing in The Wall Street Journal Economy

Comments

[Abdul Jackson]

This real estate bubble indeed made a ripple effect in the US economy. As a result, a lot of homeowners may see their home values decline, so that they likely ended much less than the original purchase price. Hmmm... foreclosures may soar and people may refuse to pay their mortgages.

[Assisted Living]

Thanks for the post, This was exactly what I needed to see.Good list, keep up the good work