Housing Market Report: Prices to Fall… and Then Recover

It’s still too early to tell exactly when this housing slump is going to end, with house prices just beginning to soften, mortgages at risk of defaulting beginning to hit reset dates and lending standards that are starting to tighten.

According to researchers at the Harvard University’s Joint Center for Housing Studies, one thing’s for sure: Before the sun shines again on the housing market, a good amount of excess inventory will have to be sold, according to the center’s “State of the Nation’s Housing” report. Employment growth will play a role as well in the recovery, as will interest rates.

In a telephone interview, Nicolas P. Retsinas, director of the center, said the housing industry was going through a “bumpy landing.” Yet despite the severe contractions in home sales and starts seen during this correction, home prices have flattened but haven’t crashed, and as a result, “we’re not seeing a return to affordability,” he said.

“If you were an economist, you would think that prices would have fallen precipitously,” Retsinas said. Instead, home-price gains have been near flat, relative to the high appreciation rates seen over the first half of the decade - which in many markets amounted to home price gains of 60% or more during those five years, he said.

According to the report, median house prices increased at least 10% in 2006 in 23 of 149 metropolitan areas studied; prices fell in 34 of the metros. Of the 11 metros that had declines of greater than 3%, nine were in economically depressed areas in the Midwest - suggesting local economic trends had a greater influence on markets than national trends.

Home prices should slide further, however, according to the report. This is good news for future home mortgage applicants; not as good for sellers, of course.

As for home sales figures, Retsinas said sales of existing homes could bottom out and begin to recover by the end of this year, with the new-home market following in 2008. The Mortgage Bankers Association also expects the market to hit its bottom at the end of the year, gradually improving from there as homes become more affordable.

And after markets burn through excess inventories, demand for new and remodeled housing will be lifted to new highs by home purchase loan borrowers. In fact, if it weren’t for some of the population trends - including the influx of immigrants into the country - the slowdown could have been much worse, said Moises Loza, executive director of the Housing Assistance Council.

The correction
Records were set for home sales, single-family home starts and house-price appreciation in 2005. The next year ushered in contrasting numbers, according to the report.

Total home sales fell 10%, starts fell 13% and house-price appreciation slowed to a few percentage points in 2006. Between the end of 2005 and the end of 2006, the number of vacant homes on the market jumped more than 500,000 units, the report noted - and that figure might even understate the overhang because some homes including seasonal or occasional-use homes might be brought back on the market when conditions improve.

Falling mortgage interest rates and unprecedented house-price appreciation started the boom, inspiring more Americans to become homeowners and more investors to buy with the intention of flipping their properties to make a quick profit.

Builders tried to meet the demand, but lag time between predevelopment work and completions brought about bidding wars. “Affordability” products with lower initial payments helped more people jump into homeownership.

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