May 29 (Bloomberg) -- Nicolas Retsinas, director of housing studies at Harvard University, talks with Bloomberg's Deirdre Bolton about the need for home prices to stabilize before the U.S. housing market can begin to recover.
Retsinas also discusses housing data released this week and the implications of rising foreclosures. (Source: Bloomberg)
By Kathleen M. Howley
May 26 (Bloomberg) -- The slump in the U.S. housing market that caused the median value of homes to decline 24 percent 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.
Existing home sales probably won’t reach pre-boom levels until the third quarter of 2010 and housing starts won’t surpass 1 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 anemic 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.
‘Green Shoots’
The world’s largest economy probably will grow 1.9 percent 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 percent on average in the first year of recovery.
Federal Reserve Bank of Dallas President Richard Fisher said earlier this month that the U.S. 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.”
Prices Fall
Data released today showed foreclosures are still weighing on the housing market. Home prices in 20 major metropolitan areas fell 18.7 percent in March from a year earlier as foreclosures rose, according to the S&P/Case-Shiller index. Economists forecast the index would drop 18.3 percent.
The recession started after U.S. banks and Wall Street firms securitized mortgage loans made to the riskiest borrowers to earn fees only to see homeowners default, prices fall and the value of the bonds dwindle.
Three of the biggest investment banks were brought down by home loan-related investments. The U.S. government committed $29 billion to engineer the takeover of Bear Stearns Cos. in March 2008 by New York-based JPMorgan Chase & Co. Six months later, Lehman Brothers Holdings Inc. filed the largest bankruptcy in U.S. history after becoming the biggest underwriter of mortgage- backed securities as real estate prices peaked.
Subprime Losses
Bank of America Corp. of Charlotte, North Carolina, bought Merrill Lynch & Co. in January after Merrill recorded more than $50 billion in losses and write downs tied to subprime home loans.
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In the early 2000's acquiring a home was a simple as buying a pair of shoes. A less than perfect credit score with no money down and no closing costs was just enough to secure a loan for a brand new home with up-to-date amenities. At the time, it seemed like the newest trend in home buying was a success, however, fluctuating interest rates and a plummeting economy tanked the housing market faster than the speed of light.
As the saying goes, one man's junk is another man's treasure, and in the case of today's housing market, it's true. If you're looking to purchase your first home, or have the liquid cash to buy up a few foreclosed properties, it can all be done.
Because home values and interest rates have fallen to a record low and inventory has spiked to an all time high, the potential buyer has the advantage. In many cases, home owners are desperately needing to sell their properties knowing they can't compete with today's low values, and as result, buyers can name their price. The only disadvantage is the difficulties of securing a loan. If you have stellar credit, it is still problematic to get that loan without proof of savings, a steady job that you've maintained for at least 18 months, and a down payment of at least 3.5 percent for a Federal Housing Loan (F.H.A.) and 5 percent through a major bank. If you have switched jobs and/or ran into some financial troubles that have been reported to the credit bureaus, don't even try. Spare yourself the time and rejection to secure a job get your credit fixed. Don't worry about time running out, as the current market is predicted to last for at least another 6 years.
If you are a first-time homebuyer, you are in luck because there is an $8,000 tax credit that was extended in February 2009 to all those who qualify for a loan. Another perk is a very low, fixed interest rate in addition to the banks footing the expense of closing costs and accepting down payments as low as 3.5 percent.
Foreclosures are a tricky business because of the hit or miss element. While you might score and find a home for half or less than what's it worth, three possibilities exist. First, you could very well find yourself a foreclosed property for a good price that's been destroyed by the previous owners so badly that the cost to repair the damages trumps what it's worth. Second, you could find a diamond in the rough and acquire a foreclosure with ease, but risk the chance of seeing no return because surrounding property values have fallen too low. Third, if you're trying to flip the foreclosure, the resale of the home could take longer than you have saved to maintain it. The best thing to do is plan to rent out the property or occupy it until it appraises to the desired return and sell.
If you're in the market to buy a home, it can be easily be done at the right time. If possible, start saving a little bit at time and continue to fix or build your credit so you "look good on paper" within the next few years.
