By Michelle Conlin and Leah Schnurr
July 15 The worst U.S. housing crisis since the
Great Depression has been declared over. But is it?
What some of Wall Street's forecasts for a recovery may be
underestimating are tectonic shifts in the U.S. economy that
make the housing market a different place from a decade ago.
Record levels of student debt, 15 years of flat incomes and
the fact that nearly half of homeowners are effectively stranded
in their houses look likely to weigh on prices into the
Several housing experts have said the market is in danger of
drifting for years. In a bleaker scenario, the fragile U.S.
economic recovery could slip back into recession if Europe's
crisis deepens or the political impasse in Washington triggers a
new budget crisis, putting the housing market at risk again.
“We've gone through half of a lost decade since the crisis
started in 2007," said Robert Shiller, co-founder of the
Case-Shiller U.S. housing price index and an economics professor
at Yale University.
The so-called Lost Decade in Japan occurred after the
speculative bubble in the 1980s, when abnormally low interest
rates fueled soaring property values. The ensuing crash has
continued to afflict the Japanese economy ever since.
"It seems to me that a plausible forecast is, given our
inability to do stimulus now, for Japan-like slow growth for the
next five years in the economy. Therefore, if there is an
increase in home prices, it's modest,” said Shiller.
A Reuters poll published on Friday showed most economists
think the U.S. housing market has now bottomed and prices should
rise nearly 2 percent in 2013 after a flat 2012. [ID:nL3E8IC42M]
Consider the plight of college graduates, who go on to
become the biggest group of first-time U.S. home buyers.
Many graduate into a climate of falling wages and soaring
rents, members of the most indebted generation in history who
owe an average $25,000 in student loans.
They elbow their way into a labor market so rough that the
number of people with jobs is at a 30-year low, health and
retirement benefits are shrinking and the young workers face a
greater chance of losing their jobs than any generation
For Steve Blitz, chief economist at ITG Investment Research
in New York, the housing market improvement has gotten as good
as it can without more improvement in the labor market.
“I don't see it worsening unless the economy goes back into
a recession, but I think it's more a case of stagnating," Blitz
It is not just the employment picture that makes the
prospect of a housing recovery so precarious.
Housing prices and income usually move in lock step. But
real median household income is stuck at the same level as
during the Clinton Administration in 1996 -- at about $49,000.
That means the housing market will remain troubled for "an
extended period of time," according to Sam Khater, a senior
economist at housing data company CoreLogic.
"It’s not about job growth. It’s about income growth,"
The housing boom -- the great aberration: U.S. home prices
versus median household income
Back in 1996, the median home price was around $80,000. When
house prices soared to $200,000 in 2006 -- the market peak -- it
was due to jumbo mortgages, not jumbo pay raises.
Banks lured consumers with low interest rates that later
turned much more expensive and blew up monthly payments,
eventually helping to cause the housing crash.
On the one hand, the housing implosion has created a bonanza
for those buyers who can take advantage of it: U.S. real estate
is now 36 percent cheaper than in 2006.
In nearly every city, it now costs less to own than to rent.
But many would-be homeowners cannot buy. Lenders have
virtually locked them out of the market by denying them
mortgages, according to statistics from the Federal Housing
Administration and a recent Morgan Stanley research report.
In May, consumers able to close on a mortgage had, on
average, a near-perfect credit score. They could afford a 19
percent down payment on their new home. And they were still on
track to spend no more 24 percent of their income on their new
house, according to the Ellie Mae Origination Insight Report.
"Most of the population can't meet current mortgage
underwriting standards," says trade publication Inside Mortgage
Finance founder Guy Cecala. "They're getting eliminated before
they even get to the door."
Some believe this credit freeze is only going to worsen.
Washington is considering new mortgage regulations that would
shift more responsibility for bad loans away from taxpayers and
investors and toward banks.
"If all these new rules that Washington is talking about are
put into place, it would be even harder to get a mortgage," said
Brian Lindy, an analyst at Amherst Securities Group, which
released a report in May entitled "The Coming Crisis in Credit
Even for those who can afford to, buying a house can be a
harrowing experience. After watching a nation crash and burn,
plenty of people remain in shock. They are loath to take the
risk anytime soon.
As research firm S&P Capital IQ's Robert Kaiser said at a
recent housing conference: "Consumer confidence simply hasn't
recovered enough to support the housing market."
BUSTED CONVEYOR BELT
The housing market, as economists often like to point out,
is a conveyor belt. A homeowner sells a house. The new buyer
moves in, and the seller buys a better house. In time, that
buyer in turn sells, and buys a better house.
Normally these so-called move-up buyers are the housing
market's biggest consumer group. They are what keep that
conveyor belt moving.
Today the apparatus is broken.
That's because about half of homeowners with mortgages
simply can't move.
Twenty-four percent owe more on their houses than they are
worth. Another 25 percent are equity poor, meaning they have
less than the 20 percent of equity required for a down payment
to trade up to a new home, according to housing-data company
Sean O’Toole, the CEO of foreclosure-data aggregator
ForeclosureRadar.com, estimates that it will take at least
another decade, at the housing market's current pace of growth,
for homeowners who are underwater just to break even on their
“We went from $4.5 trillion of mortgage debt in 2000 to
$10.5 trillion of debt in 2008 -– and we are still only down to
$9.8 trillion,” says O’Toole.
“All those people with negative equity, they can’t sell.
They are stuck in a prison of debt."
A HIT WITH MULTI-GENERATIONAL HOMES
The U.S. housing market is actually hundreds if not
thousands of markets.
Cities such as New York and San Francisco have joined other
world cities, like London and Hong Kong, to form a global
housing market that aligns its fortunes with the wealthy elite.
Then there's Stockton, the California city that filed for
bankruptcy in June. A recent Rockefeller Institute of Government
research report suggested it could turn into a ghost town with
its lack of jobs and abundance of abandoned, foreclosed homes.
Still, there's no doubt that in most places the housing
market appears to have bottomed out and is now gathering
The places that were hit hardest -- like the warm states
where baby boomers go to retire -- are snapping back, and some
states with strong income and job growth, like the natural gas
haven of North Dakota, are solid.
“I don't think it's a head-fake, because when you look
across all your price measures and construction measures on the
starts side, you're seeing broad-based indication of
improvement," says Beata Caranci, deputy chief economist at TD
Bank Group in Toronto.
But even those who say the recovery is on are subdued. "We
have to be a little bit cautious," said Caranci. "It's the
beginning of a recovery."
The Case-Shiller home price index, considered a bellwether
of the U.S. housing markets, rose in May for the third
Those price hikes, however, reversed just a sliver of the
wealth lost since the housing peak: $200 billion of the $6.7
trillion that has evaporated since 2006, according to a recent
Bank of America report.
Some of the biggest jumps -- such as the 10 percent
year-over-year price gains in foreclosure-filled cities like
Phoenix and Miami -- were largely due to banks holding back
inventory. That's because of lingering legal problems from the
so-called robo-signing foreclosure scandal as well as a
reluctance to flood the market, according to CoreLogic's Khater.
"Don't let the volatility in prices fool you," he said.
"Yes, prices are increasing in some markets, but in the longer
term it has to come back to incomes, and unless incomes are
increasing, price increases are not sustainable."
At this point in a typical cycle, executives at the
homebuilding companies are usually the loudest members of the
housing recovery pep squad. Yet the mood has been subdued in the
most recent round of earnings conference calls with homebuilder
In late June, Lennar, the third-largest homebuilder in the
United States, reported a rise in new orders for the fifth
straight quarter, helping to push share price to a year high in
Executives had foreseen that, after the housing crash,
family members would start to live together as a way to save.
Lennar started designing a new home that included a
600-square-foot apartment with its own entrance called the
“Multi Gen Home.” It has been a hit.
Nonetheless, Lennar’s chief executive officer, Stuart A.
Miller, told analysts in June that he was nervous about uttering
the word recovery.
“I don't think that there's reason for exuberance right now
-- except for the fact that the beatings have stopped.”
-- except for the fact that the beatings have stopped.”
(Additional reporting by Cezary Podkul and Tim Reid; Editing by
William Schomberg, Mary Milliken and Prudence Crowther)
Keywords: USA HOUSING
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