By James R. Hagerty and Jonathan Karp and Mark Whitehouse
From The Wall Street Journal Online
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.
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."
Email your comments to rjeditor@dowjones.com.
-- June 12, 2007
Reader discussion on the U.S. housing market.
Has your bubble popped? Discuss whether recent changes in the housing market have affected your plans to buy or sell a home.
22990 Messages: Most Recent | < 1-10 > | Oldest
post my message
Boston Market - Jun 12, 2007 Reply
Read this
Just one example: This is a house which sold for $385,000 almost 4 years ago. By Happy's calculation, The house should be selling for $798,336. That is assuming Happy's guaranteed 20% year over year return. 292 days on the market and 5 price reductions later, the value of this house is unchanged over a 4 year period Like so many others and the buyer is losing a substantial amount of money after all costs are factored in. I don't need to rely on some dopey "expert" to tell me what is going on. Groucho Marx said it best: "Who are you going to believe, me or your lyin' eyes?"
PapaSmurf - Jun 12, 2007 Reply
NAR is full of you know what. By now I'm used to taking their worst case scenario numbers and tripling them to get a more realistic prognosis. Their outright lies are a glimpse of what the real estate business has been turned into over the past half dozen years. It sucks because it makes many honest and hard working real estate professionals bad.
Jack - Jun 12, 2007 Reply
So the toxic loan market is "vanished." Well, good! But how is that revelant 2 years after the boom and with prices only 0.1% off the peak of 2005? Could it be that the toxic loan problem wasn't so much of a problem then? Ouch, I know it hurts when you can't save to finance your house but you can pick up more skills at your local community college and volunteer for overtime work at your employer. We all did, and now own 80% equity. It's easy if you put your mind to it.
blindedbythehype - Jun 12, 2007 Reply
So if I overpay by 100k and hold for 20 years, it will not matter.
How about the extra 100K, is that not a loss, even if I ultimately sell the house for more, will I not always be down that extra 100k, plus the investment return on that 100k? How about the interest I pay on that extra 100k for 20 years, is that not too a loss?
That fact that some people cannot seem to fathom this is truly amazing to me.
Do the Math - Jun 12, 2007 Reply
Middle: Shoot the messenger when you don't like the message. You want to win but can you do it from your rental by the railroad tracks? I own, you don't. If you're feeling age discriminated because we say you're going to be old when you pay off your 30-year mortgage, so be it. It hurts to be reminded of the inevitable things huh? I know.
Do the Math - Jun 12, 2007 Reply
If anyone wants free advice on how to become wealthy and invest in RE please let me know. One condition: you will refrain from saying that the RE market or the economy or anything else is overpriced or inaccessible. I bought when I had very little savings but I was fully employed and in the process of updating my job skills. Now I own 80% in my home. In any era, in any market, the RE will be inflated if your personal situation is out of line. Let's look at how to fix you up to become wealthy. I'm sure my friend Response wouldn't mind teaming up with me to help out those of you who really need help. We wait.
Rhaze - Jun 12, 2007 Reply
Not to dance on your parade, but in a normal year there are 500,000 foreclosures so in 2.5 years, one would expect 1.250 million foreclosures. Obviously, that will be expected to go up, whether it will go up enough to contribute another 250,000 foreclosures a year, it very well could. But even if it does, it probably won't have long-term negative affects on RE. 2.5 years is a pretty small window for real estate. Plus, the feds and banks will help keep some of those foreclosures from happening. The banks will because they don't want the feds messing with their way of life and they don't want to get hammered by Wall Street any more than they have to. No, I'm not a RE agent, I do invest and have for 25 years in RE and I'll ride this one out, just like I did the 1990s in SoCal.
Another Wise Old Man - Jun 12, 2007 Reply
Mr Bubble News gloated: "I don't know about you but I'm going to bring a bottle of Bubbe-ly and will dance in the street...Dance and drink to the demise of the hucksters, frauds, charlatons, and flippers who ripped a lot of innocent people off."
Have some compassion for those who innocently are being run over by this train-wreck.
Tony - Jun 12, 2007 Reply
You don't speak for me Middle. I just sold my house for 12% more what I paid for in 2004. I had bought $400,000, sold $448,000 and the buyer paid all the closing costs and split a small commission we paid to the broker. You do make money off RE depending on your local market.
Rags to Riches - Jun 12, 2007 Reply
Shamboo: Thank you it is your posts that keep me motivated. I agree with your post. I'm not a Realtor just a guy who took ownership and I have made serious money doing so. I too was suprised that a Father would tell his daughter to rent. It is a sad day when I read that one. I believe many apartment landlords are spreading fear to keep their apartments full. It is obvious that the bears are just apartment landlords, that could be the only motivation, keep the underclass in the rental apartments.