Experts cannot agree on how long housing’s crisis will continue or how to fix the problem.
You may have noticed my characterization of the situation as a “crisis,” and certainly everything that has happened in housing in the last three years has been tragically dislocating to millions of families and profoundly harmful to the economy. No one knows when it all will end or even how bad things will be when it’s finally over.
The effects of the bursting bubble have thrown lives into chaos and helped make a shamble of the economy, and that’s where the word “crisis” comes in. Whether ameliorating the crisis means that the nation will–or should–return to 68-69 percent home ownership is another matter on which I have written and will consider again below
Morgan Stanley housing strategist Oliver Chang:
Whether it’s the sidelined, shadow or current inventory, the issue is there’s more supply than demand. Once you reach a bottom, it will take three or four years for prices to begin to rise 1 or 2 percent a year.
Economic forecaster Joshua Shapiro of Maria Fiorini Ramirez Inc.:
Rising supply threatens to undermine government efforts to boost the housing market as homebuyers wait for better deals. Further price declines are necessary for a sustainable rebound as a stimulus-driven recovery falters.
Chief Economist Sam Khater of CoreLogic:
Working through the surplus inventory varies by markets and depends on issues such as local employment and the amount of homeowner debt. (Nevada has the highest percentage of homes with mortgages more than the properties are worth, while New York State has the lowest, according to the company.)
Residential credit strategist Sandipan Deb of Barclays:
Prices will drop another 8 percent, to 2002 levels, before beginning a recovery in 2014.
Barry Ritholtz, CEO of the FusionIQ research firm and author of Bailout Nation:
If the market doesn’t fall to its natural bottom, price gains in the next five to 10 years won’t keep pace with inflation as the difference is made up “on the backend.”
The belief has been: if we stimulate sales with a tax credit and delay foreclosures with modifications, the market would stabilize. We’re just putting off the day of reckoning and drawing out the pain by not letting the housing market hit its bottom.
In a post last week, Calculated Risk allowed that excess supply of existing housing units and negative equity were two key problems for the housing market.
The blogger makes these points:
It takes jobs to create households, and usually housing is the key driver for employment growth in the early stages of a recovery. So this is a trap: the excess supply means weak employment growth, leading to few new households, so the excess supply is absorbed slowly – putting off more robust employment growth.
The excess supply is also pushing down house prices (prices are just starting to fall again). Lower prices will eventually help clear the market, however lower prices will push more homeowners into negative equity.
And negative equity is the other key problem for housing. It is difficult for homeowners with negative equity to sell, it is difficult to move for employment or other reasons, it is hard to refinance, and it is demoralizing for many homeowners (especially those with substantial negative equity).
Because of underwater homeowners, those with negative equity, foreclosures and defaults will remain at a high level for an extended time. Says CalculatedRisk:
It is important to note that falling house prices helps clear the excess supply, although more jobs and more households is the preferred solution. However falling prices makes the negative equity problem worse.
The last economist I’ll cite is Robert J. Samuelson, whose op-ed piece in the Washington Post seems to want to have it both ways:
In an ideal world, we would discard failed policies. We would trim or end the mortgage-interest tax deduction. We would curtail the GSEs’ loans and guarantees (the promise to repay mortgages that default). The consequences need not be dire. The homeownership rate, already down to 67 percent from its 2004-06 peak of 69 percent, would probably stabilize in the mid-60s. People would save more for down payments. Mortgage rates might rise a bit.
Samuelson expresses agreement with Guy Cecala, publisher of Inside Mortgage Finance, who contends that now is “not a good time to make permanent solutions for housing.” The economist thus concludes:
The single-minded promotion of home ownership failed and, paradoxically, undermined the American dream. It contributed to the housing “bubble” and favors housing investment over new industries and technologies. But to end it, we need to make haste slowly.
As I see it, the housing crisis was caused only superficially by lax lending standards and fundamentally by a euphoric perception that the music of rising prices would never stop producing a drumbeat of better and even better times for borrowers.
The true cause of the housing crisis is, and remains, the federal government’s fixation on home ownership as virtually a constitutional right as sacred as freedom of speech. I’m exaggerating, of course, but I disagree with the sentiment. While home ownership certainly is desirable, conferring benefits to society as a whole, it never should have been, nor should it be, at all costs.
Finally, there is no escaping the fact that sellers will be hurt by falling prices, which is essentially the only cure for the crisis in the housing market and, by extension, recovery in employment and the economy.
Mortimer Zuckerman, who owns U.S. News & World Report and numerous other properties, put it this way in the Wall Street Journal:
There is no painless, quick fix for this catastrophe. The more the government tries to paper over the housing crisis and prevent housing from seeking its own equilibrium value in real terms, the longer it will take to find out what is true market pricing and then be able to grow from there.
There can be no cure without a heavy dose of bitter medicine, and it’s a damn shame.
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Charles Rutenberg Realty
127 E. 56th Street
New York, NY 10022
Tags: Bailout Nation, Barclays, Barry Ritholtz, Bloomberg, CalculatedRisk.com, CoreLogic, FusionIQ, Guy Cecala, housing bubble, Inside Mortgage Finance, Joshua Shapiro, Maria Fiorini Ramirez, Morgan Stanley, Mortimer Zuckerman, Oliver Chang, Robert J. Samuelson, Samuel Khater, Sandipan Deb, Shadow inventory, U.S. News & World Report, Washington Post