[Editor's Note: This housing market forecast is the latest installment of a new Money Morning series that will analyze the outlook for key portions of the U.S. and global economies during the last half of this year. Upcoming installments will detail the outlook for the retail sector, for banking, and for China, to name a few.]
By Don Miller
In past downturns, it was a resurgent U.S. housing market that led the American economy out of the recessionary doldrums.
But U.S. investors shouldn't expect history to repeat itself this time around.
'It's going to be different this time," Behravesh said. 'The pattern this time will be the government kick-starts housing, and then consumer spending comes around to kick-start the economy."
Just past the 2009 midway mark, the U.S. housing market remains one of the biggest concerns for U.S. investors.
But it's also the biggest puzzle – thanks to the confusing and often-conflicting array of reports and data that continue to appear.
On one hand, the avalanche of foreclosures continues to drag down home prices in many markets – just as the federal government is taking unprecedented steps to make money available to prospective homebuyers.
On the other hand, however, surging unemployment is keeping buyers on the sidelines, and lenders remain reluctant to loosen their purse strings, and are forcing borrowers to meet stricter credit-quality standards.
The bottom line: The U.S. housing market appears to face a long, hard climb out of the biggest hole it's occupied since the Great Depression.
That figures to keep the housing market on the mat until mid- 2010 – or even later. Here's a look at the main factors that will drive the market for the remainder of this year, and for a good part of 2010.
Market Research Creates a Confusing Picture
The U.S. housing market is widely tracked and the resultant data often present a juxtaposition of over-simplified snapshots. It's a jumble of closely followed reports – some from the U.S. government and the rest from private researchers – that too often can confuse rather than clarify what's really happening.
Consider some of the most recent reports that – when viewed together – combine to create a contradictory picture of the U.S. housing market:
- Sales of newly constructed homes fell unexpectedly in May and were 32.8% below the same month a year ago, the Commerce Department reported during the last week of June. Housing starts are now at their lowest level since 1945.
- But housing starts are showing early signs of a turnaround in 33 of the nation's metro areas, with 140 metro areas showing gains in home prices from a year earlier, according to the Adversity Index compiled by MSNBC and Moody's Economy.com.
- Building permits in May were at a seasonally adjusted annual rate of 518,000, or 4% above the revised April data, but 47% below the 978,000 recorded in 2008.
The reason the market gets this kind of intense scrutiny is simple – the construction of new homes and sales of existing homes is the engine that has powered every U.S. economic recovery since 1960.
New home construction starts began to climb an average of seven months before gross domestic product (GDP) rebounded in each of the past seven contractions. And sales in the residential real estate market jumped about four months before the economy picked up, according to data provided to Bloomberg News by David Berson, chief economist of mortgage insurer PMI Group Inc. (NYSE: PMI).
But the recent data has left some analysts underwhelmed – if not downright puzzled.
In fact, the $8,000 first-time homebuyer tax credit and U.S. President Barack Obama's $75 billion program to subsidize some mortgage payments haven't done enough to revive the market, according to Eric Belsky, executive director of Harvard University's Joint Center for Housing Studies in Cambridge, Mass.
'It hasn't been much more than a see-sawing of data," Belsky told Bloomberg in an interview where he suggested more government intervention will be needed to right the U.S. economy.
'Housing has led the U.S. economy out of every recession for at least 50 years, and for that to happen again, more stimulus is going to be needed." Belsky said.
But if the government does intervene again to boost the housing market, you can be sure it will aim most of its ammunition at the underlying causes of the housing slump – namely unemployment, foreclosures and bank lending.
Unemployment Not Letting Up
With prices hitting multi-year lows in some markets, homes may be more affordable than they have been in decades. But if job losses continue, the price tags will become a lot less relevant to potential homebuyers.
As reported previously by Money Morning, unemployment in the United States has soared to its highest rate in a quarter of a century, and is projected to zoom even higher.
At last tally the 'official" government unemployment stood at 9.5%. Even the White House is admitting that the official rate will hit 10% by the end of the year, underscoring Vice President Joe Biden's weekend admission that the Obama administration 'misread" the severity of the nation's economic problems.
But if you include the people that the government doesn't even count – such as unemployed farm workers, the idle self-employed, and workers in private homes – the unemployment rate now approaches an astonishing 20%.
And if the rate of unemployment keeps rising at current rates, things could get a lot worse. During five of the past six months, the U.S. jobless rate has increased by about 0.5% per month. Here are the numbers:
- January: 7.6%.
- February: 8.1%.
- March: 8.5%.
- April: 8.9%.
- May: 9.4%.
- June: 9.5%.
Even if the rate of growth were to come down, the official rate seems likely to top 10%. If it grows at 0.45% per month, the official rate will end the year at 12.55%. If it continues to grow at just 0.1% per month, which seems highly improbable, it would still easily pass 10%.
With about 6.5 million people having lost their jobs since the recession began in December 2007, and with millions of others working longer and harder to keep their current positions, the nation's soaring unemployment rate has the potential to put a paralyzing chill into the U.S. housing market.
"People that are afraid for their jobs are not going to make those purchases and people that are losing their jobs can't get the loans," Daniel Penrod, industry analyst for the California Credit Union League in Rancho Cucamonga, Calif., told Reuters.
Foreclosures Continue to Mount
With an inventory of 2.1 million unoccupied houses on the market, the highest foreclosure rate in history is acting as a serious drag on an economic turnaround. And the increasing number of foreclosed homes that will soon come onto the market will continue to depress prices and dampen construction of new properties and re-sales.
According to RealtyTrac Inc., 860,000+ properties were repossessed by lenders last year, up a whopping 64% from 2007.
But that may pale in comparison to 2009. Lawrence Yun, chief economist of the National Association of Realtors told Bloomberg that the number of foreclosures this year may rise to a record 2.5 million.
Ballooning foreclosures have a predictable effect, driving prices lower as banks unload unwanted assets from their books. That may explain why sales of existing homes are rising while new home starts continue to lag.
"Newly constructed homes simply cannot compete with the values found in the existing home market," Bob Walters, chief economist at Quicken Loans Inc., told Bloomberg.
While foreclosures are affecting prices in most markets around the country, some areas are particularly hard-hit. An astonishing 73% of all existing houses and condos sold in the Las Vegas area last month were foreclosures, up from 56% a year earlier,MDA DataQuick research shows. Foreclosures accounted for 51% all existing-home transactions in California.
Meanwhile, the median price for an existing, single-family detached house in California plummeted 30% to $267,570.
And there are other dark clouds on the horizon.
The number of foreclosures increased to an all-time high of 1.37% of total loans outstanding, while the first-quarter mortgage delinquency rate, which tracks loans over 30 days past due, climbed to a record 9.12%, the Mortgage Bankers Association said.
'We have to be ready for more waves of foreclosures coming through for at least the next year," Andrew LePage, an analyst with MDA DataQuick, told Bloomberg. 'And no one really knows how big those waves are going to be."
And the numbers of Americans who own homes that are underwater continues to grow.
Remarkably, about 20.4 million of the 93 million houses, condos and co- ops in the U.S. were worth less than their loans as of March 31, according to Seattle-based real estate data service Zillow.com.
As the chart below shows, the decline in the housing market has slashed more than 55% of total homeowner equity since 2005, diminishing the 'wealth factor" for many homeowners, and forcing them to curtail spending.
And when consumers slash spending, which accounts for almost 70% of all U.S. economic activity, the economy can't fire on all cylinders.
Mortgage Lending Stifled
Meanwhile, mortgage lending is being held in check by a rise in interest rates and stricter qualifying rules imposed by bankers.
Interest rates on a 30-year mortgage have climbed to 5.42% from a low of 4.78%. The cost of borrowing initially fell in March after the U.S. Federal Reserve said it would purchase as much as $1.25 trillion in mortgage-backed securities. But rates followed U.S. Treasury note yields higher after investors grew concerned that federal spending would fuel inflation.
And even though 'demand remained at elevated levels" in April, mortgage lending at the 20 big U.S. banks that received Troubled Asset Relief Program (TARP) funding dropped 3% to $114.2 billion, the U.S. Treasury Department said in a June 15 report.
In a separate report, the U.S. Federal Reserve said about 50% of banks actually tightened requirements for prime mortgages in the first quarter, asking for more money down and more collateral. The same number of banks said that they had opted to tighten standards for home equity loans.
'Six years ago, standards were pretty permissive, and two years ago all you needed was a pulse," Grant Stern, a mortgage broker and owner of Morningside Mortgage Corp. in Miami Beach, Fla., told Bloomberg. 'Nowadays, even people who have reserves that equal amount of the loan are getting rejected."
But some analysts say the tighter lending standards are a natural reaction by bankers to the number of defaults seen during the past two years.
'The risk of lending today is much greater than it was a few years ago, so banks are being more prudent," said James Chessen, chief economist of the American Bankers Association in Washington, D.C.
'Hyper-local" Market Means Averages Don't Apply
Even with all the negative news about the housing market, the bottom line is that the vast majority of U.S. homeowners won't be selling this year or next.
The typical house is owned for five to seven years, and only about 5% of U.S. housing stock turns over in a single year, meaning only one in 20 homeowners plan to sell this year.
And the very nature of the housing market makes it impossible to generalize about individual markets. Indeed, U.S. housing market data is an amalgamation of reports from a wide range of local markets, which is why it's so difficult to make any pronouncements about the market's overall health, says Andrew Waite, a former institutional investor who is now the publisher of a magazine that focuses on real-estate investing.
'It's like a weatherman who combines conditions in Nome, Alaska and Clearwater, Florida and issues an 'average' national forecast of 45 degrees," Waite told Money Morning in an interview. 'Real estate markets are by their very nature 'hyper-local.' Averages simply don't apply."
Waite is the publisher of the Personal Real Estate Investor, a magazine for investors who buy houses or condos to manage for income or to fix up and sell for a profit.
Real estate is segmented by individual neighborhoods, and is further subdivided by price points and such price-influencing factors as condition, cash flows – and even cap rates on rental properties, Waite says.
The Bottom Line: No Recovery Until 2010
Behravesh, the IHS Global Insight chief economist, says it's very clear that the American housing market doesn't have the horsepower this time around to lead the U.S. economy out of its current malaise. In fact, the most recent reports have led some analysts to conclude that the U.S. housing market probably won't recover until 2010.
The stubborn combination of rising unemployment, home foreclosures, and tight lending means there's little chance sales will increase enough this year to end the housing recession, Andres Carbacho-Burgos, an economist with Moody's Economy.com (NYSE: MCO) in West Chester, Pa., told Bloomberg.
'We have a lousy job market and an excess of around 1 million extra homes that has to be worked off," he said in an interview. 'The housing market is not going to hit bottom before mid-2010."
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