Housing-market recovery still several years away

Housing-market recovery still several years away

By Glenn Roberts Jr.
Inman News


While several economists maintained in the early descent from the real estate boom that a "soft landing" was in store, the latest UCLA Anderson Forecast predicts a very bumpy ride for the housing market and a near-miss with a recession.

David Shulman, senior economist for the quarterly University of California, Los Angeles, forecast, stated in his outlook that the nation's economic performance is expected to be "almost as close as you can get to avoid the technical definition of a recession." That means low growth in the nation's gross domestic product -- about 1 percent in fourth-quarter 2007 and in first-quarter 2008, according to Shulman's "A Near Recession Experience" report.

There are dangers, too, that things could get worse. "When the economy slows to a 1 percent pace, it runs the risk of falling into an actual recession just as when an airplane's velocity dips down to its 'stall speed' and falls out of the sky," Shulman states in the report. "In that sense our forecast can be viewed as somewhat optimistic."

While an earlier Anderson Forecast called for housing starts to bottom-out at an annual rate of 1.2 million to 1.3 million, the forecast report released today expects a range of 1 million to 1.1 million for housing starts "and perhaps more importantly we now believe that the recovery will be far more tepid with starts barely recovering to a 1.4-million-unit annual rate by the end of 2009."

Housing starts are projected to experience a 55 to 60 percent peak-to-trough decline, Shulman said, with home prices falling 10 percent to 15 percent. The decline in housing starts would resemble a similar drop-off in 1986-91, he said. "I hope we're done lowering our numbers," he said.

Home-price declines are expected to drop through the end of 2009 and perhaps further out, Shulman said. Florida, California, Arizona, Nevada and parts of the Northeast are probably most susceptible to larger price drops, he said.

Credit tightening in the mortgage market has complicated property purchases in high-priced states such as California, he said, and the mortgage industry is moving toward "more full documentation, real cash down payments and more serious income standards -- and that's going to take a lot of people out of the market at the current price structure." The problems in the mortgage market could lead to some painful adjustments in home prices, he said.

"I don't think lending standards were ever as lax ... and that's the cause of the problems," Shulman said.

The national scope of the real estate foreclosure problem in some ways resembles the Great Depression, he said.

Consumer spending is projected to drop, and auto sales, for example, are expected to hit the lowest level next year since 1998.

"Although it has taken longer than what we had previously forecast, the effect of housing weakness has finally spilled over into consumer spending on durable goods," the report states. "Nevertheless, we are still sticking to our story that we will not have a classic recession."

Shulman's report notes that the nation's trade sector is improving and a strong global economy should increase exports.

But he also states that "'Star Wars' buffs would characterize the August seizing up of financial markets as 'a disturbance in the force,' " and mortgage defaults have spread to Alt-A and prime home loans.

The Federal Reserve has taken steps to patch up the market, Shulman states in his report. "It seems to us that what the Fed is trying to accomplish is simultaneously restore liquidity to the financial markets without reinforcing the notion of what was called the 'Greenspan put' where aggressive market participants can lay off their pain on to the Federal Reserve. Simply put, the Fed wants to avoid the problem of what economists call 'moral hazard' by putting risk back into the system where risk takers are both rewarded and punished for their actions."

The Anderson Forecast expects the Fed to cut the federal funds rate from 5.25 percent to 4.5 percent by the end of this year. "The cuts will be undertaken to support the economy, not specifically to bail out the financial [or housing]markets," the report states.

While some people are comparing the mess in the financial markets in August to the 1987 stock market crash or the 1998 Long Term Capital Management crisis, Shulman states in his report that "both analogies are wrong ... the economy in both 1987 and 1998 was much stronger than it is today." And because the crisis this time around has its origins in the domestic mortgage market, "we believe the impact on the real economy will be far greater this time than the prior two events."

Given the approaching presidential election year, Shulman said the mortgage crisis will provide some high theater, including "clear heroes, clear villains and ... ritual sacrifices." He said, "A lot of people are going to be very embarrassed before this is over."

And with all of the legislation in process now to address the mortgage problems, it's possible that the country will get "a whole new mortgage finance system when it's all over," he said.

Shulman's report concludes, "We forecast that it will take years for the housing market to recover to 'normal,' and the situation will be exacerbated in the short-run by changes in legislation affecting the mortgage industry."

A separate Anderson Forecast report focusing on California's economy predicts that the state is also expected to escape a recession, though the report's author states that the difference between a sluggish economy and a recessionary economy "is getting smaller all the time."

That report also notes that mortgage defaults and foreclosures "continue to occupy center stage in any discussion of local housing markets," and that most mortgage defaults have occurred in owner-occupied homes. The California counties with the highest foreclosure rates are those with "middle-of-the-pack home prices, but extremely high usage of adjustable-rate mortgages -- exactly the combination we'd expect when working families stretch beyond their means to buy a home," the report states.