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Harvard Economist Calls Signs of Recovery ‘Inconclusive'
 Recent signs such as increasing affordability and lower mortgage rates indicate improvement in the housing market, but it is still too early to declare that housing has hit bottom, Eric Belsky, executive director for the Joint Center for Housing Studies at Harvard University, said during NAHB’s Construction Forecast Conference last week in Washington, D.C.
“The market is now ‘under-demanded’ as opposed to being overbuilt,” he said. “Demand has been driven down to low levels by fear, accelerating job losses and a lack of access to credit.”
Belsky cited a number of factors that are needed to spark demand — lower mortgage interest rates, stabilizing home prices, stabilizing job markets, a reliable stream of mortgage credit and cause for optimism.
On the flip side, Belsky said that there are tentative signs that buyers are beginning to return to the housing market as a result of low home prices, a significant drop in mortgage interest rates and strong government efforts to provide liquidity to financial markets and keep mortgage rates low. Despite these positive developments, he still sees several danger signs.
“Employment will take a long time to recover, which will put pressure on housing demand. While interest rates are lower, there is sharply less credit available to people who were previously getting it. The subprime and Alt-A markets are near a standstill, so a lot of people who might be looking to buy may be unable to.”
A steady uptick in home sales and consumer confidence is needed for a turnaround in housing, Belsky said.
“I think you look for signs of a recovery over several months,” he said. “If you have three or four good months of increases in home sales and a two- to three-month upturn in consumer confidence, we are turning the corner. Now we haven’t seen these signs, but things are not going much lower.”
Belsky said to look for the following signals to determine if housing has hit bottom:
- The economy is well into recession, which is a leading indicator of recovery.
- Job growth is negative but slowing.
- The inventory of unsold new homes is falling for several quarters.
- New home sales start to rise, driving down the months’ supply of homes on the market.
- Housing starts begin to rise a quarter or so later.
- Home prices show signs of a recovery.
Examining these factors has so far proven inconclusive, he said. While the economy is well into a recession and the inventory of unsold new homes has been moderating, the rate of job losses has shown no signs of declining and the data on new home sales and prices suggest that it is still too early to declare a positive trend.
“You could make the argument that we are near the bottom and demand is waiting to pull us out of it,” he said.
To restore balance in the marketplace, Belsky said that home builders must continue to hold production below demand in order to work off excess inventory and that foreclosures must be restored to normal levels.
Looking at the market over the long term, Belsky said that new household formations should be robust, fueled by the growing echo boom generation — the children of the baby boomers — and continued immigration growth.
“The echo boom today is even larger than the baby boom at comparable ages and the baby boomers will drive growth in older households,” he said. “Even under low immigration assumptions, household growth in 2010 to 2020 should rival the 1995 to 2005 period.”
Photo by Morris Semiatin
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