"In many areas, particularly outside the overbuilt markets of Arizona, Florida and Nevada and the huge bubble market of California, home prices may well stabilize" and begin to recover before the end of this year.
Case acknowledges history might not repeat, as the U.S. could be on the cusp of a painful recession. Unlike the three prior dips of a million-plus starts -- in the first quarter of 1975, the second quarter of 1982 and first quarter of 1991 -- the latest slide was triggered by insensate speculation and suicidal lending practices rather than the traditional factors of rising unemployment and interest rates and slowing economic growth. Thus, he says, a protracted dip in the economy would temper his optimism, though the official measures of economic growth don't indicate a recession yet.
Jim Paulsen, chief investment strategist of Wells Fargo's primary investment unit, expects home prices to steady by year end, with the pace of foreclosures slackening shortly. Most of the subprime debt at the center of the current crisis already has been written down by financial institutions, he notes, while many subprime borrowers who lost their homes are returning to rental units. "Folks who compare this home-price cycle to the one that occurred in the early '80s obviously have short memories," Paulsen says. "In the 1980s the economy was in a deep recession, mortgage rates were at 17% or more, and unemployment (was) hitting a post-Great Depression high of nearly 12%."
THE STEEP DECLINE IN HOME prices -- Case prefers to study the ratio of sale prices to per-capita income in various locales -- already has improved affordability. The change in such ratios varies by market, with Florida, Arizona and Nevada typically tracing short boom-and-bust cycles because any surge in speculative demand quickly is followed by overbuilding, due in part to the abundance of cheap land. The ratio in Phoenix, for example, has been reverting to a more typical six times home prices to income, after soaring to nine times in 2005 and '06.
Most volatile are popular metro areas, such as Los Angeles and Boston, where housing demand is high, along with restrictions on development. Los Angeles' affordability ratio doubled from 2001 to 16 times at the height of the housing boom, before dropping back to around 11. The Boston market never grew so frenzied, perhaps because it was far from the center of the subprime-lending business in Southern California, where an array of bad business practices flourished. Boston's housing-affordability ratio peaked at 12, and since has returned to a more normal nine times prices to income.
Building a New Foundation: The U.S. housing market typically begins to improve after housing starts have fallen by a million units or more, says economist Karl "Chip" Case, co-creator of the S&P/Case-Shiller Home Price Indices. Case measures the affordability of homes in various markets via the ratio of home prices to per-capita income. Such ratios rose to excessive heights in recent years in many metro markets, but lately have reverted to more normal levels in cities like Boston and Phoenix.
For much of the country, particularly in the industrial Midwest, affordability never became a problem. In Detroit, for instance, a race to the bottom between home prices and per capita income left the ratio at under four times. Chicago's ratio likewise has been well-behaved, bobbing between five to seven times.
Now sales activity seems to be picking up. According to the latest report from the National Association of Realtors, sales of single-family homes, condominiums, town houses and co-ops edged up 2% in May from April's levels. That might not sound like much of a jump, but May marks only the second month in the past 10 to have seen an increase.
Much of the gain came from markets such as Sacramento, Las Vegas and California's San Fernando Valley and Monterey County, all regions where lenders were unloading large numbers of foreclosed properties. In Detroit, too, sales are soaring, albeit at median prices of under $30,000.
Cape Coral, Fla., a Gulf Coast city of some 170,000, has been depicted in the New York Times and Good Morning America as Foreclosure Central. Yet, in the past two months year-over-year sales have jumped more than 40% as a result of avid bargain-hunting. So-called 3-2-2-1s (three bedrooms, two baths, two-car garages and one swimming pool) that sold for more than $300,000 at the height of the boom now are being snatched up in bulk by investors for as much as 60% less, says local Realtor Tommy Lee. "I'm telling people to come on down and take a look, but only if you have pre-approved credit, because with gas prices where they are, I don't want to be running a taxi service," he says.
NAR economist Lawrence Yun is optimistic home prices will stabilize in the next five months and begin to recover next year, despite today's gloom and overly stringent lending standards. NAR officials typically are cheerleaders, but Yun advances some reasonable arguments to buttress his view. Home sales, he notes, currently are running at a pace of about five million a year, around the same level as a decade ago. Yet, the population has grown by 25 million in the past 10 years, and the U.S. has created 10 million new jobs. Though the rate of new-household formation requires the net addition of 1.6 million housing units a year, housing starts likely will remain below one million into next year, creating pent-up demand in the years ahead.
TODAY'S HOUSING BUST IS unique in U.S. economic history.
