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Harvard Says It's Too Early to Tell When Housing Slump Will End
Economists at the Joint Center for Housing Studies of Harvard University aren’t entirely sure how long it will take for the current industry correction to run its course, but they say that once market balance is restored, the outlook becomes “brighter” and even “upbeat” over the longer term.
With the downturn now in full swing, measuring the size of the inventory overhang of unsold new homes is crucial to predicting the depth and duration of the downturn, according to “State of the Nation’s Housing 2007.”
“Much depends on what happens with the economy, interest rates and credit availability,” the Harvard report says. “But it also depends importantly on just how much demand was inflated during the housing market run-up and how fast builders can work off the oversupply of homes.”
While it may be an underestimate, the jump of more than 500,000 in vacant homes for sale between the end of 2005 and the end of 2006 seems to provide the clearest indication of the amount of excess inventory, they say. If that number is correct, then actual demand for new homes in 2004 and 2005 averaged 250,000 units less than the 2.1 to 2.2 million homes, including manufactured homes, added during each of those two years, leaving sustainable annual demand at about 1.9 million.
“Since housing starts and manufactured home placements were still at about that level last year, there was no progress toward cutting excess inventories,” the report says. “Starts and placements combined would thus have to fall to 1.65 million for at least two years to work off such an oversupply.
“If the excess is closer to 800,000 units, placements and starts would have to hold near 1.5 million per year. In the most pessimistic view, the overhang may exceed 1.0 million units, meaning some rental vacancies may need to be worked off as well.”
With credit standards tightening, mortgage defaults mounting and house prices under pressure, the Harvard economists note that demand could slip further, increasing the supply of vacant unsold homes.
Factors now in play that could prolong the agony of working down the inventory:
- Significantly falling prices could discourage sellers from selling and buyers from buying, but house prices held up both nationally and in the majority of metro areas in 2006. Using the National Association of Realtors®’ conservative measure, median prices were down for the year in less than one-quarter of the 149 metro areas evaluated. The largest drop of 7.4% was in Detroit, where employment fell 2.0%. Of the 11 metros experiencing house price declines of more than 3.0%, all but two were in economically depressed areas of the Midwest.
Fourth-quarter 2005 to fourth-quarter 2006 changes suggest that another 25 metro areas posted nominal price declines of more than 3.0%. On the list are some coastal Florida metro areas, Dallas, San Diego and several metros that during the boom had especially strong house price appreciation, speculative buying and single-family overbuilding, such as Fort Myers, Fla.; Reno, Nev.; and Sacramento, Calif.
“While some large markets may post significant drops merely because prices inflated ahead of income between 2000 and 2005, overbuilding and employment losses have historically been much better predictors of impending corrections than price appreciation,” the report says.
“Indeed, the probability of any price decline – and especially a large one — is much higher in and around periods of overbuilding or a combination of overbuilding, price overheating and employment losses than in periods of escalating house prices alone.”
- With rapid house price appreciation no longer enabling recent home owners to quickly build equity in their homes, the risks imposed by subprime adjustable rate mortgages, which typically were created with steep initial discounts, have become much greater as those loans reset between two and five years after their origination.
“As the first wave of these loans begins to reach their reset dates, the signs are not encouraging. Between the fourth quarter of 2005 and the fourth quarter of 2006, the share of troubled suprime loans jumped from 6.6% to 7.9%. As increasing numbers of borrowers risk losing their homes to foreclosure, higher than expected losses have driven some mortgage companies into bankruptcy and others to increase their reserves against losses,” according to the report.
“It is too early to determine when the housing slump will end,” says the Harvard Joint Center. “House prices are only beginning to soften, loans most at risk are just starting to hit their reset dates and credit standards have tightened. The adjustment will be particularly painful for those home owners overwhelmed by higher mortgage payments, lenders that underestimated risk and builders and owners forced to sell.”
A Ray of Sunshine
However, once the current storm has blown over, “ongoing demand for new and improved homes promises to lift the value of new construction and remodeling to new highs,” says Harvard. “Greater productivity will help raise real incomes for many, while record wealth will allow households to spend more on housing. But between strong growth in demand and increasingly restrictive development regulations, house prices will continue to move up.”
Harvard economists estimate that demand for new homes should total 19.5 million units from 2005 to 2014. “Although the pressures on lenders to tighten underwriting standards and on builders to work off a still-unknown surplus could reduce the total somewhat, new home completions plus manufactured home placements should easily surpass the 18.1 million added in 1995 to 2004.”
The study notes that immigrants, on course to hit a record-setting 12 million between 2005 and 2015, have become increasingly vital to the housing market, representing some 14% of recent home buyers and 18% of renters in 2005.
Immigrants accounted for more than a third of net household growth between 1995 and 2005 and are likely to account for at least that large a share between 2005 and 2015.
“While still concentrated in a handful of gateway metros, immigrant households are beginning to settle in a growing number of locations across the country,” Harvard’s annual study says.
Principal funding for the report was provided by the Ford Foundation and the Policy Advisory Board of the Joint Center for Housing Studies. NAHB is among the organizations providing additional support.
 Want to Know the Housing Forecast for the Top 100 Metros?
Find out in HousingEconomic.com’s 2007-2008 Metro Forecast (free preview). Get the metro forecast with in-depth analysis, overviews and downloadable Excel tables.
To learn more, visit www.HousingEconomics.com.
 NAHB Kit Gives Builders Back-to-Basics Tips in Cooling Market
With the current cooling of the nation’s housing market expected to persist into next year, NAHB has developed a comprehensive online toolkit geared to providing association members with information that will help them prosper in today’s changing business environment.
To access the “Back to Basics” toolkit, you must be an NAHB member and have a login to www.nahb.org. To create a login, go to www.nahb.org/login or click on the log-in button on the main menu bar.
For assistance, call the NAHB Member Service Center at 800-368-5242.
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