Shaky job market threatens housing recovery
CHICAGO (MarketWatch) -- The housing slump, already shaping up to be the worst in a generation, still hasn't run its full course, according to Harvard University's annual report on housing, released on Monday.
And if job losses accelerate in coming months, it could take even longer for local markets to regain their footing, said Nicolas P. Retsinas, director of the university's Joint Center for Housing Studies. Job losses could be "the last shoe to drop, but a pretty heavy shoe," he said in a telephone interview.
The center releases its "State of the Nation's Housing" report each year, and not surprisingly, the 2008 edition gave a grim prognosis for housing markets throughout the country.
In short, local markets are dealing with drops in housing starts, new home sales and existing home sales -- corrections that are rivaling the deepest slowdowns since the World War II era, the center reported. On top of that, the fall in home prices and the rise in mortgage defaults are the worst on record since the 1960s and 1970s. See the Joint Center for Housing Studies Web site.
All this adds up to a downturn that is "the most severe that we have seen," Retsinas said.
Other key points in the report:
- Last year marked an acceleration of home-sale declines, propelled by falling home prices and the credit crunch. The pain in the housing market spread to the rest of the economy by the beginning of this year, as the drop in home building, turmoil in the credit and stock markets and the effect of falling home prices on borrowing and consumer spending contributed to the slowdown.
- Real home equity (adjusted for inflation) fell 6.5% to $9.6 trillion in 2007. And home-price declines as well as a slowdown in home-equity withdrawals conspired to trim one-half of a percentage point from real consumer spending and more than one-third of a percentage point from total economic growth.
- During 2003 to 2005, housing prices surged so far ahead of incomes that by 2006, the number of households (both renters and owners) paying more than half their income on housing rose to 17.7 million, or 15.8% of all households. Today, lenders are requiring larger down payments and higher credit scores, squeezing many would-be buyers out of owning a home -- even though prices have fallen.
- More proof of the changing lending landscape: Subprime loans fell to 3.1% of originations in the fourth quarter of 2007, from 20% in 2005 and 2006. Interest-only and payment-option loans fell to 10.7% of originations in 2007, from 19.3% in 2006.
Some markets will recover faster
For housing to stabilize, the inventory of homes for sale needs to decrease, Retsinas said. But while construction cutbacks have helped reduce the supply of unsold new homes, the number of vacant homes for sale still remains high.
According to the report, the homeowner vacancy rate jumped to 2.8% in the last quarter of 2007, from 2.0% in the last quarter of 2005, as the number of vacant units rose by more than 600,000. At the end of last year, the report estimates that the oversupply of vacant, for-sale units numbered about 800,000 -- equal to 1% of the owner housing stock.
"Builders overbuilt, lenders over-lent and borrowers over-borrowed -- and we're paying a price for that," Retsinas said.
That said, he expects some markets to recover sooner than others. Boston, for example, has less of an inventory problem right now than Phoenix, he said.
Also, those markets hit hardest by foreclosures will likely take longer to recover. The number of homes entering foreclosure almost doubled to 1.3 million in 2007, from about 660,000 in 2005, according to the report.
The problems are most severe in certain areas, such as Ohio, where the foreclosure rate was 3.9% -- or one out of every 25 homes -- in the fourth quarter of 2007. The foreclosure rates in Michigan and Indiana followed close behind.
"There's more to this than just the big meltdown that occurred in the financial markets... it's localized and a longer-term problem if not addressed sooner than later," said Saul Ramirez, executive director of the National Association of Housing and Redevelopment Officials, an advocate for affordable housing.
Vacant homes that have been foreclosed on require effort to keep up. Beyond yard maintenance and vandalism, vacant homes also can become a haven for criminal activity, or even stripped of valuable fixtures such as sinks, toilets and copper plumbing, he said.
When this happens, "it costs even more ... to bring the property back to the level of occupancy and eventually homeownership," he said.
A shift in thinking
The homeownership rate rose 5 percentage points from 1994 to 2004, peaking at 69%, and has fallen since, according to the report.
In fact, the largest rise in homeownership occurred before 2001, before the subprime market really started taking off -- a result of factors including favorable mortgage rates, vigorous economic growth and lower home prices in the wake of the 1991 recession. During that time, there also was a federal push for lenders to meet the needs of low-income communities and minority borrowers; automated underwriting and statistical models of loan performance also allowed lenders to relax down payment and debt-to-income requirements.
Growth after 2003, however, came in large part from more subprime, interest-only and payment-option loans, which provided a temporary lift to homeownership. These loans are now experiencing steep default rates.
Still, in the long term, demand for housing will bounce back, Retsinas said. Over the next 10 years, the outlook for household growth is about 14.5 million, signaling likely long-term demand.
But pinpointing when housing will ultimately turn around is more difficult.
Historically, housing markets usually recover after an economic recession and a mix of falling mortgage rates and dropping home prices, Retsinas said. This particular housing downturn will likely take longer to rebound due to the high volume of foreclosures and the constraints in the credit markets, he added.
In the meantime, maybe Americans need to redefine what a home is, he said. As home prices are declining in many parts of the country, perhaps homeowners should focus on the consumption aspect of a home more than the investment aspect, he added.
"After all, a home is to live in primarily, not for buying and selling," he said.Amy Hoak is a MarketWatch reporter based in Chicago.