US Housing Market Seen Hitting Bottom Soon

Source : The Business Times, May 27 2009

But weak rebound likely, with housing starts near WW2 low

(BOSTON) The slump in the US housing market that caused the median value of homes to decline 24 per cent since 2006 may bottom next month without any prospect of a rebound for another year, according to estimates from chief economists at Fannie Mae and Freddie Mac, the Mortgage Bankers Association and national realtors and homebuilder groups.

End of the road: New-home sales traditionally lead all other indicators in a recovery but it may not be the case this time, say economists

Existing home sales probably won't reach pre-boom levels until the third quarter of 2010 and housing starts won't surpass one million until 2011, a barrier last broken six decades ago, the economists said.

'There are very few V-shaped recoveries in the history of real estate, and this one is likely to be even slower because of the size of the bubble,' said Robert Shiller, the Yale University professor who, with economist Karl Case, created home price indexes in the 1980s now used by Standard & Poor's.

The rebound will be so anaemic that 2009 building starts will total about 496,000 homes, the lowest since the end of World War II in 1945, according to the economists' forecasts.

Foreclosures on pay option adjustable-rate mortgages and a backlog of bank-owned properties will slow any revival and keep housing from playing its traditional role of boosting economic recovery.

Residential construction and home sales led the way out of the previous seven recessions, with housing starts improving an average seven months and resales gaining strength about four months before the economy picked up.

The world's largest economy probably will grow 1.9 per cent next year, according to the average estimate of 56 analysts surveyed by Bloomberg. After each of the last seven contractions, it expanded more than 3 per cent on average in the first year of recovery.

Federal Reserve Bank of Dallas president Richard Fisher said earlier this month that the US is on the verge of rebounding with 'healthy signs - the stirrings of what I call green shoots.' So did former Fed chairman Alan Greenspan, who cited 'seeds of a bottoming' in housing during a May 12 speech at a National Association of Realtors conference in Washington.

'If you are looking at prices relative to income and rents, you could argue that we are at the bottom, and I'm cautiously optimistic that we may be,' said Thomas Lawler, a former Fannie Mae economist in Leesburg, Virginia. 'It's possible, however, that we could have a second wave of foreclosures and the very small amount of support the economy might have gotten will turn into the reverse.'

The recession started after US banks and Wall Street firms securitised mortgage loans made to the riskiest borrowers to earn fees only to see homeowners default, prices fall and the value of the bonds dwindle.

Homeowners like Craig Mitchell of Boise, Idaho, said they're paying the price for Wall Street's greed. Mr Mitchell, 66, said his video-editing business has dwindled in the recession. He said he's now being forced to sell his truck to make his mortgage payment while he seeks a buyer for the three-bedroom home he owns in a state with the fifth-highest foreclosure rate in the US.

The house is priced at US$289,000, about US$140,000 less than what it would have fetched three years ago.

Mr Mitchell may be waiting a long time for a buyer as the housing market tries to recover from the worst slump since the Great Depression.

While new-home sales traditionally lead all other indicators in a recovery, it may not be the case this time because the drop has been unlike any other since the 1930s, Mr Lawler said.

'History suggests that new-home sales bottom long before unemployment peaks, and perception of the economy starts to improve long before we see actual economic improvement,' Mr Lawler said. 'This time around we don't know if that will hold true.'

Prices in California fell for six years during the last major housing slump in the 1990s, and didn't return to their 1991 peak until 2006, according to the Federal Housing Finance Agency.

About US$40 billion of mortgages at US banks have payments 90 days or more overdue, more than triple the US$11.5 billion of homes the banks already hold, according to data from the Federal Deposit Insurance Corp in Washington. Another US$78.8 billion are 30 to 89 days overdue, the FDIC said. -- Bloomberg