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"Economists
are giving up on the idea that the U.S.
housing slump will be quick and relatively painless.
"Instead, more are concluding, the downturn that began
nearly two years ago will last at least through the end of 2007,
remaining a major drag on the U.S. economy. The culprits: a glut of
homes for sale and growing caution among lenders who now regret being
so free with their mortgages during the boom.
![[Not Over Yet]](NA-AN108A_HOUSI_20070608200901.gif)
"Most forecasters still expect the economy to regain
some momentum this year after a slow first quarter. Recent data have
shown manufacturing, business investment and trade on track to help
offset the negative effects of falling home values on consumer
spending. Even so, some economists expect economic growth this year to
remain tepid, largely because of the weak housing market.
"This worry coincides with a surge of inflation anxiety
that has roiled stock and bond markets in recent days. Yields on
10-year Treasury bonds, which influence the cost of various forms of
borrowing throughout the economy, have risen above the psychologically
important 5% level to the highest point in nearly 11 months. That in
turn has led to a big drop in stock prices: Both the Dow Jones
Industrial Average and the Standard & Poor's 500 fell nearly 2% for
the week after hitting all-time highs early on.
"The rise in interest rates is only adding to the
gloom. The average rate for 30-year fixed-rate mortgages stood at about
6.65% Friday, up from 6.35% in early May, according to HSH Associates,
a financial-publishing firm in Pompton Plains, N.J. Though that rate
remains far below the 8.2% average of the 1990s, the recent jump makes
it harder for many Americans to afford new homes. 'That's putting more
pressure on housing and delays its ultimate recovery,' says Andrew
Tilton, a senior economist at Goldman Sachs in New York.
"Federal Reserve Chairman Ben Bernanke acknowledged in
a speech Tuesday that the housing market remains weak, and warned that
residential construction 'will likely remain subdued for a time, until
further progress can be made in working down the backlog of unsold new
homes.'
"The market started to cool in mid-2005 after a buying
frenzy that drove up the average U.S. home price nearly 60% in the
first half of the decade and more than doubled prices in many areas
near the East and West coasts.
"Late last year, some economists were saying the market
would start bouncing back by the middle of 2007. That hasn't happened,
partly because inventories of unsold houses have continued to grow and
a surge in mortgage defaults has made lenders much more reluctant to
grant credit to people with spotty payment histories.
"David Resler, chief economist at Nomura Securities
International Inc. in New York, says he is surprised by the degree to
which speculation caused builders to overestimate demand, leaving a
glut of houses and condominiums.
"That means single-family housing starts, which have
declined 33% since early 2006 to a seasonally adjusted annual rate of
about 1.2 million in April, will remain low, around the current level,
through the first quarter of 2008 before starting to recover gradually,
Mr. Resler predicts. Goldman's Mr. Tilton thinks single-family starts
will drop to an annual rate of one million or so before bottoming out
in the second half of this year.
Reflecting this worse-than-expected slump, Mr. Resler
recently trimmed his forecast for economic growth in the second half of
this year to an annual rate of 2.8% from 3%. He sees about a 33%
chance
that the U.S. economy will slip into a recession in the next year. If
it does, he says, the weak housing market would be largely to blame.
Among the risks, he says, are that depreciating home values will make
consumers more cautious in spending and that many more housing-related
jobs will be lost.
"Ian Shepherdson, chief U.S. economist for High
Frequency Economics, a research firm in Valhalla, N.Y., doesn't expect
a recession but says weakness in housing will help keep U.S. economic
growth at a sluggish pace averaging less than 2% for the next several
quarters.
"Housing accounts for a lot of jobs, not only in
construction but in related areas such as mortgage finance and
furniture sales. Zoltan Pozsar, senior economist at Moody's
Economy.com, estimates that housing-related sectors created nearly 1.3
million jobs between January 2003 and March 2006. Since then, he says,
housing jobs have declined by almost 300,000. He sees more losses to
come during the summer, which is usually a big building season.
"Home values can also influence consumer spending, as
people use cash-out mortgage refinancings and home-equity loans to pull
money out of their houses. At the peak of the housing boom in the third
quarter of 2005, people were taking cash out of their homes at an
annual rate of $709 billion, according to Michael Feroli, an economist
at J.P. Morgan Chase
& Co in New York. As of the first quarter of 2007, that number had
fallen to $178 billion.
"A prolonged housing slump would be particularly
painful for retailers of the kinds of things people often buy when they
move, such as building and gardening supplies. According to the
Commerce Department, those retailers saw sales drop by 6% in the year
ending April.
"Meanwhile, empty houses are multiplying. A recent
Merrill Lynch report tallies a record 2.2 million vacant single-family
homes and condos for sale nationwide, about one million above the norm.
Florida's Miami Dade County has a 31-month supply of existing condos on
the market. About 20,000 new ones will be completed by the end of 2008,
says Jack McCabe, a consultant in Deerfield Beach, Fla. He says about
two-thirds of those have been sold, but many buyers are canceling
orders rather than taking possession of a depreciating asset.
"Some local markets remain strong. Prices have
continued to rise in Manhattan, Seattle, Houston and some other areas.
But in much of the country, home prices have been flat to moderately
lower over the past year.
"Economists at Merrill Lynch admit it is hard to
predict how the slump will play out from here. 'We are not sure how
deflating a $23 trillion asset class -- the value of real-estate assets
on the household balance sheet -- will end, but we doubt that it will
end well,' Merrill economists wrote in their recent report.
"The outlook is confusing for the average home shopper,
too. Bill Shakespeare, a marine-engine salesman who doesn't mind the
inevitable jokes about his name, attended an auction of foreclosed
homes in San Diego last month, hoping for a steep bargain. Wearing a
red baseball cap and windbreaker, the 74-year-old Mr. Shakespeare made
an initial offer of $140,000 for a 600-square-foot condominium. Then he
gave up when the bidding spiraled to the winning level of $180,000.
"Mr. Shakespeare, one of more than 1,000 people who
turned up at the auction, notes that there are plenty of other condos
on the market, some of which have been unoccupied for months. 'We're
not going to be rushed into anything,' he insists.
"The auction in San Diego was one of three held in
Southern California last month by Real Estate Disposition Corp. of
Irvine, Calif. The auctions, at which a total of about 280 homes were
offered, attracted several thousand people, demonstrating that there
are lots of bargain hunters waiting to pounce on the right deal. But
the auctions also underlined the trouble some of those opportunists
have in obtaining credit. In several-dozen cases at these auctions,
homes had to be put back on the block after initial winners failed to
qualify for a loan.
"Lenders have eliminated most no-money-down 'subprime'
loans for people with weak credit records. That means many people who
hoped to buy homes this year will have to wait until they can clean up
their credit records and save for a down payment.
"At a conference of mortgage lenders in May, David
Lowman, head of the mortgage business at J.P. Morgan Chase & Co.,
warned: 'The largest part of the problem in the subprime space is ahead
of us, not behind us.' Many borrowers who got loans the past
couple of
years are still paying the low initial monthly payments and have yet to
face the steeper adjustable rates that kick in after two or three
years. Once they do, foreclosures are sure to rise.
"Mark Zandi, chief economist of Moody's Economy.com, a
research firm in West Chester, Pa., expects lenders to acquire about
900,000 homes this year and roughly the same number next year through
foreclosures, up from an average of about 500,000 a year from 2000
through 2006. That will add to the glut of homes on the market, further
depressing prices in some areas.
"At the San Diego auction, homes typically sold for
around 25% less than their most recent sales prices or appraised
values. (The comparison includes a 5% commission paid by winning
bidders.) Demand seemed stronger at another recent auction of
foreclosed homes in Los Angeles and Orange counties. Many of the houses
offered there sold for about 85% to 95% of previous prices or
appraisals.
"At the Los Angeles auction, Suresh Gupta, a condo
developer, made the winning bid of about $1.2 million for a
three-bedroom home in Pasadena, where he and his family plan to move.
The house had a previous value of $1.5 million. Mr. Gupta thinks the
auction price compares favorably with what he could get through a
conventional purchase. 'There is no justification for the prices many
homeowners are asking for,' he says. 'They are living in a dreamland.' "
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