Economic Picture Darkening for Most Parts of the Country
Most parts of the country are now feeling the sting of a widening recession, with fewer state and regional markets escaping the economic doldrums than in the typical national downturn, economists at NAHB's 77th Construction Forecast Conference said last week.
“The bust we’re in is without precedent,” noted Mark Zandi, chief economist of Moody’s Economy.com. However, there is reason for optimism that “the financial market panic will abate within the next two to four weeks,” which is the assumption upon which he bases his current market projections.
With average home prices already off 20% from their peaks, Zandi expects a weak job market and rising foreclosures to push prices down another 10% between now and the middle of next July, when he sees the market hitting bottom. However, prices won’t start climbing again until late 2010.
“Nationwide, 27 states are in recession and 14 are very close to recession,” said Zandi, leaving people virtually nowhere to go to find a significantly brighter economic picture. Parts of Texas and all of North Dakota are exceptions to the rule, but on the whole, he said, this recession is taking hold “coast-to-coast.”
Meanwhile, Zandi estimates that there are currently 12 million home owners who owe more on their mortgages than their homes are now worth, “and if I’m right, approximately 15 million home owners will be underwater by this time next year.”
At the same time, he expects job losses to mount over the coming year, with the unemployment rate peaking at 8%. “When you mix employment loss with negative equity, that’s when you have a significant problem,” he said.
As dark as the situation has become, Zandi was able to cite “three good, fundamental reasons to believe we’re seeing the light at the end of the tunnel”:
- Housing affordability has improved significantly. “Many Americans can now afford to buy a home because the ratio of house prices to income has improved and in many places is now back to its long-term average,” he said.
The difference between what it costs to purchase vs. rent a home still favors renting at this time, he said, but “if prices go down another 10% and effective rents go up just 3% to 4%, that’s the day that both house price-to-income and price-to-rent ratios will have returned to their long-term average and a recovery in home prices will be underway.”
Housing markets on the longest road to recovery are those where both price-to-income and price-to-rent ratios remain above the long-term average — Denver and Orange County, Calif. providing two examples.
One surprising area with good potential for home price gains is coastal Southern Calif., Zandi said, a region where home prices are now actually undervalued.
- Efforts to reduce the excess inventory of unsold homes are making good progress. Zandi estimates it will take another two years to work off the approximately one million excess homes in the inventory nationwide, with new-home construction not staged for a meaningful comeback until 2011, or even later.
- The availability and affordability of mortgage credit should get much better. “The nationalization of Fannie Mae and Freddie Mac means lower mortgage rates,” he said, and once today’s panic-attack in the financial markets subsides, rates on conforming mortgages will go back down to “well below 6% — possibly as low as 5.5% to 5.75%.” (One day after the NAHB conference, Freddie Mac’s Primary Mortgage Market Survey showed 30-year fixed-rate mortgages averaging 6.04% for the week ending on Thursday, Oct. 23.)
While crediting government policymakers for good work on mending the financial markets, Zandi said that more still needs to be done, including the likelihood of another round of economic stimulus and careful consideration of a substantial boost for housing.
One proposal would be to double the mortgage interest deduction for next year’s home buyers, 2009, then phase out the incentive over a three-year period, he said. “This would be a measurable inducement to buy a home, and such ideas are reasonable to include in the discussion” over how to frame further stimulus, said Zandi. “We don’t want to increase housing supply, but we do want to increase demand.”
Bernard Markstein, NAHB’s director of forecasting, agreed with Zandi that the housing slump has spread beyond areas of the country whose markets became most overheated during the boom, but he emphasized that recovery is on the way. “We are definitely optimistic about the end of 2009, beginning of 2010 as the period when we’ll really be coming out of this downturn,” said Markstein.
With the possible exception of Texas, Markstein observed that most of the country is taking a beating from the economic downturn now underway. Paving the way for better times, he added, “builders are doing what they have to do, as painful as it is, to reduce construction.”
In his regional outlook, Markstein reported that two states — New Mexico and New York — stand out for posting smaller housing start declines over the past year, but even they are down by 5% to 10%.
Both Zandi and Markstein said that the financial and housing markets will make an eventual comeback and may emerge from their current tribulations in a sounder position.
“Historically speaking, this kind of mess happens every 10 years,” Zandi said, referring to the cyclical downturns that cool off the economy. “But what’s going on now is so significant, it’s searing our collective psyche. We’ve learned something important, and changes that policymakers are enacting now regarding the regulation of our banking system will be codified under the next President so that we will have a better system in place at the end of the day.”
Photos by Morris Semiatin
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Free NAHB Kit Gives Builders Back-to-Basics Tips to Navigate the Slowdown
What was once expected to be a relatively mild housing slump following three years of record new home construction and sales has given way to a significant downturn.
To help members navigate the uncharted waters of this slowdown, NAHB has compiled a comprehensive “Back to Basics” online toolkit — the best of the basics, the tried and true and the truly new. To access the toolkit, click here.
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