Zandi Forecasts More Home Price Declines Ahead
While housing in some of the downturn’s hardest-hit markets is now actually undervalued and nationwide housing affordability is about as good it has ever been, home prices haven’t fully stabilized yet, according to economists focusing on the regional outlook at NAHB’s Construction Forecasting Conference last week.
Housing production and sales have likely hit bottom across most of the country, but some further downward movement can still be expected in house prices on a nationwide basis, said Mark Zandi, chief economist and co-founder of Moody’s Economy.com.
“I previously thought that we’d hit bottom in terms of prices during this spring or summer — and that is when things began to stabilize — but now I believe that another 5% to 10% price decline is likely through next summer,” he said, as the result of sales of foreclosed homes picking up steam.
Zandi estimated that there are now about 16 million U.S. home owners — almost one-third of all those holding a first mortgage — who have negative equity positions in their homes and can’t sell them for as much as they owe on the mortgage.
He also said that about 35% of problem mortgages that are modified through a government program will wind up heading back toward foreclosure within three years, and that’s being optimistic.
Compounding the problem, just as many of these foreclosures are hitting the market, the Federal Reserve may be ending the credit-easing support in the secondary mortgage market that has helped keep mortgage rates so low. Zandi said, however, that there was a good chance the Fed would have to delay cessation beyond its March target.
Prices won’t be able to turn firmly upward, he said, until the inventory of distressed properties for sale declines, and that’s why the housing recovery will probably limp along with modest, gradual improvement until the end of 2011 or beginning of 2012.
Meanwhile, home prices in “housing bust” markets in California, Florida and Nevada are now actually lower than they should be relative to income, Zandi said. But in some other markets that remain overvalued compared to income — such as parts of the Northeast and Northwest — softening prices can be expected in the months ahead.
Some States More Robust Than Others
Robert Denk, NAHB’s assistant vice president of forecasting and analysis, concurred that housing affordability has now improved significantly across the country, but that price declines may not be completely a thing of the past just yet.
“Whereas home prices hovered between three and three-and-a-half times the median income throughout the 1990s and early 2000s, they peaked at about 4.7 times the median income during the housing boom,” said Denk. “Since then, they’ve been coming down and are now just about back to where they’ve been historically in relation to income.”
Denk pointed out that states where the price-to-income ratio has declined the most — Ohio, Indiana and Michigan — are those where declining home values are more related to overriding economic conditions than to previous overbuilding or dramatic price escalations.
But like Zandi, he said there are still some places where prices remain well above their historic norms relative to income — including New York, New Jersey, Washington and Oregon. While home prices have come down some in these areas, he said, it’s likely they will see further price softening or a more sluggish recovery than other markets.
Denk agreed with Zandi that in places like California, Nevada, Arizona and Florida, home prices have over-corrected.
“But in this case there’s an exception to the rule that once prices have come back to near normal, they will have stabilized,” he cautioned. “For a state like Kentucky, that would be very true, but not necessarily in the four states just mentioned,” where more price declines are still possible due to ongoing foreclosures.
He agreed that the “bust” states of Florida, Nevada, Arizona, Nevada and Michigan will be the slowest to recover from the housing downturn, while states with energy-related and agricultural commodities will have the most robust recoveries — including Texas, Oklahoma, Kansas, New Mexico, Montana, North Dakota and Wyoming.
More Housing Stimulus Needed
In forecasting a near-term housing recovery, Zandi said he assumed that the first-time home buyer tax credit would be extended through at least mid-2010. And he said that policymakers need to do more to help stimulate the market to ensure that a sustained recovery can take hold.
Noting that he is not typically a fan of “government subsidies for housing,” he said that in this case federal help is absolutely necessary.
“My sense is that an extended tax credit will spur 350,000 to 400,000 additional home sales, which would be a big factor in stabilizing the market,” he said. And expanding tax credit eligibility beyond first-time buyers “would certainly help slow price declines,” which is why he “strongly advocates the application of the credit to all buyers.”
Zandi also said that the government should extend the currently higher conforming loan limits through the end of 2010; extend Net Operating Loss carryback provisions and expand their application to larger businesses; work to make the Troubled Asset Relief Program more successful; and ensure that the Federal Reserve fulfills its commitment to purchase Fannie Mae and Freddie Mac mortgage-backed securities. Absent such support, he said, his forecast would likely prove to be overly optimistic.
Photos by Morris Semiatin