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EconomicsHousing recovery: Smooth sailing or rocky road?
'It seems we’re at a fork in the road: will housing finally begin to recover or is there more trouble ahead?'
National and local commentators seem to be filled with welcome optimism regarding the recovery of the economy and its impact on housing markets. New home sales were up 14.8 percent in April for the second straight month and sales were nearly 50 percent higher year-over-year, according to CNNMoney.com. Toll Brothers, a major builder of residential communities, is reportedly buying large amounts of land in anticipation of a better future for home building.
It’s also widely reported that new jobs are being created. This aids in strengthening demand for real estate. A recent report of nearly 100 economists agreed that the economic recovery is underway and housing may show signs of recovery by 2011.
But there is reason to be cautious. The very same news outlet, CNN.com, also ran a piece called “Think Housing is Recovering? Think Again.” It seems we’re at a fork in the road: will housing finally begin to recover or is there more trouble ahead?
Despite all of the good news for housing, one major problem remains — the huge inventory of housing already on the market and the expected additions to it. Many widely cited economists expect further price reductions where supply is an issue. Moody’s Economy.com predicts an average price decline of an additional 10 percent in 2010. Those raising concerns indicate that the misleading indicators showing strong recoveries in March and April stem from the now- expired tax credits and current low interest-rate levels.
It’s an empirical fact that sales drop off directly after the expiration of tax credits. It happened with the “cash for clunkers” program and it’s expected to happen in residential housing. The increase in activity is stimulated by the government program, not necessarily in the form of additional purchases, just accelerated ones. In the period which follows the program, there are fewer purchasers left since they moved faster to get the rebate. Thus, the expectation is for a sluggish second half of 2010 in housing markets.
In addition, we continue to see low mortgage rates, typically a sufficient condition for strong housing demand. But not in this recession. The Fed finished purchasing mortgages and mortgage-backed securities this spring and the conventional wisdom is that this has kept interest rates lower than they would have been without the program. Yet the number of borrowers seeking a mortgage has fallen to its lowest level since May 1997.
As a result of these two factors — tax credits and artificially low interest rates – the Federal Housing Administration’s (FHA) David Stevens noted on CNNMoney.com, “This is a market purely on life support sustained by the federal government.” Without a reduction in unemployment or growth in household income, house prices will remain flat or perhaps “double dip” (i.e., a new round of price declines will occur after recent months of stabilized prices).
Meredith Whitney, a highly visible New York banking analyst, predicts that prices will be falling again due to the tremendous pressure from additional foreclosures coming in the months ahead. Moody’s predicts 1.9 million foreclosures in 2010 and more than a million in 2011. With the inventory already on the market, prices cannot be expected to rise. Also, with the recent rising optimism sellers are reportedly ready to come back to the market, a trend that will further dampen.
We can hope that the housing market in the future will be different than it is now but it will take some time. Slow growth with high unemployment is like this. In the next blog, I’ll review a major report by the Urban Land Institute on housing prospects and strategies for the decade ahead. There are indeed reasons for long-term optimism.
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Austin Jaffe, Ph.D. is PAR's Consulting Economist from the Smeal College of Business at Penn State University. |
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Dr. Jaffe-I always appreciate your candor, thoroughness, and careful analysis. You tell us the truth, even if it hurts!
Harry,
I assure you I don’t like to propose gloomy forecasts. I too look forward to better economic conditions in housing markets. The trouble is that it is taking sooooooo long!!
Thanks for your kind remarks.
Austin
Dr Jaffe:
As a delegate to the PAR quarterly meetings, I always appreciate what you have to say in your presentations. You are usually right on target. I don’t like what I hear at times; however, your presentations are most informative. Thanks, Dr. Jaffe.