Worst Housing Slump in 50 Years Has Not Run Its Course
The current housing downturn is shaping up to be the worst in 50 years, and it has not yet run its full course, according to the annual “State of the Nation’s Housing" report issued on June 23 by the Joint Center for Housing Studies of Harvard University.
“Despite product cuts rivaling those in the 1978-1982 downturn, the number of vacant for-sale homes on the market did not shrink in the first quarter of 2008,” the report says.
“The weak economy, tight credit and concerns over whether house prices had bottomed out continued to suppress demand and delay the absorption of excess units,” according to the study, which marks the 20th year that Harvard has been reporting on housing in the U.S. “Until this oversupply is reduced, housing markets will not mend,” the study warns.
While Harvard’s housing analysts remain bullish about the longer term prospects for housing demand, currently the industry faces what is described as “a rocky road ahead.”
Over the next decade, demand fundamentals should support average annual completions of more than 1.9 million units, including manufactured homes, the study says. But “the housing market must first work off the one million or more excess units that were vacant and for sale or temporarily taken off the market at the beginning of 2008,” a process that could trim demand to an annual average of 1.8 million units in the decade ahead.
A severe economic recession could make today’s situation worse, by further reducing household formation rates and forcing more households to double up, dampening immigration, keeping older units in the supply longer and reducing sales of second homes.
In the case of a mild downturn, which appears to be what the nation is now experiencing and is the consensus forecast for a majority of economists, “the fundamentals of demand are likely to drive a strong rebound in housing once prices bottom out and the economy begins to recover.”
However, “with credit markets in such disarray, the for-sale housing inventory at record levels and only small declines in interest rates, emerging from today’s housing slump could take some time,” the report cautions.
The good news is that the industry has made some progress in working down its inventory of new single-family homes, which has declined from a peak of more than 570,000 units in mid-2006 to less than 500,000 early this year. The bad news is that a precipitous drop in home sales has pushed the inventory to an 11-month supply, the highest it has been since the late 1970s.
Existing single-family home sales haven’t fared much better, with the supply “rocketing” to 10.7 months by this April.
“With a supply of more than six months considered a buyer’s market, homes for sale can languish for some time, inviting lowball offers that motivated sellers eventually accept,” the report says.
“Since home owners often resist selling at below-peak prices, adjustments in many markets have been larger on the new home than on the existing home side. Nonetheless, most current owners are unwilling to accept lower prices even if doing so enables them to buy new homes at more deeply discounted prices.”
House prices will remain under pressure until the number of vacant for-sale units on the market or being held off the market falls significantly. From 2005 to 2007, vacant single-family homes for sale were up more than 45%, according to Census Bureau figures, and vacant units being held off the market were up almost 10%.
The report says that working off today’s oversupply of homes will require some combination of the following:
- A further decline in housing starts
- A decline in home prices substantial enough to bring out new bargain-seeking buyers
- Interest rates dropping enough to improve affordability
- Improvements in job growth
- A return of consumer confidence
- Mortgage credit again becoming more widely available
“Turnarounds are often difficult to spot because false bottoms in sales and starts are common,” the Harvard study says. “Builders take their lead from consumers, ramping up production when sales increase and cutting back when they fall. Thus, only a sustained rebound in demand will bring the market back.”
Demand has not been stimulated by declining mortgage interest rates as much as in past downturns, the study notes. “In fact, after adjusting for points, real 30-year fixed mortgage interest rates were down marginally some 24 months after housing starts peaked. At the same point in previous cycles, real mortgage rates had fallen anywhere from 0.5 to 6.8 percentage points.”
Other factors putting more prospective buyers on the sidelines than in the past include a dramatic drop in home prices and the highest foreclosure rates since recordkeeping began in 1974.
“All of these factors may make this downturn more protracted than usual, and credit market woes may slow the eventual rebound,” the report warns. Spending on home improvements “will also come under increasing pressure because it is sensitive to both credit availability and house price appreciation.”