Report: Housing Crisis Remains Long-Term Challenge

Research shows expected slow turnaround and continued U.S. housing market weakness should not have a detrimental impact on its overall long-term growth potential. Housing affordability, however, remains the chip-on-the-shoulder issue persisting in the long run.

The 2007 State of the Nation's Housing report from Harvard University's Joint Center for Housing Studies indicates that even though in time the housing market will recover, currently it is adjusting to "sharp drops in housing demand and an oversupply of stock" as many homebuyers, investors and second homebuyers opted out. Housing starts and sales fell in 2006 and "are on track to end this year even lower" causing house price depreciation in some areas.

"The air went out of the inflated housing market as higher home prices and interest rates finally tempered demand," explained Nicolas P. Retsinas, director of the Joint Center for Housing Studies.

The report found in the latter half of 2006, the drop in homebuilding was so drastic that it shaved more than a full percentage point off national economic growth. Though builders cut back on housing starts, the numbers of vacant homes for sale rose by more than 500,000 from the fourth quarter of 2005 to the fourth quarter of 2006 and continued to rise in the first quarter of 2007.

"Last year we talked about a turning point ahead, and as we know over the last year the market did turn. We're clearly going through a market correction that is slowed because of the problems of subprime lending," Mr. Retsinas told MSN.

In the short run, Mr. Retsinas believes the marketplace "will work off this inventory and we'll see the existing home markets start to turn around maybe as early as the end of 2007 and will go into 2008 before we see a turn around.

"The long-term prospects remain bullish. It's a question of how long it will take us to get through this correction? It's as if we forgot that this is a cyclical industry, because for many years it kept going up, up, up. Some people thought it would never stop. I have called it 'extreme extrapolation complex.' Well, it is a cyclical industry and we're in the downside of the cycle. As a result of that, some people took out mortgages otherwise they wouldn't have."

Asked whether there were any surprise findings in the report, he said, "As we look at the data, the extent of the overbuilding surprised us, as well as how severe the contraction was. On the other hand, it is worth noting that prices have not dropped precipitously."

Moreover, despite variations in different markets overall, real estate prices were "relatively flat." What makes that finding interesting in his view is that it shows "the problem of affordability hasn't necessarily improved, even though the market has slowed."

The report has traditionally reviewed demographic related housing developments. "It becomes clearer and clearer" that immigrants and children of immigrants - or foreign-born households - are really becoming the backbone of the housing market, Mr. Retsinas said, in different ways that are not limited to demand for housing, but also as a labor resource in the construction side of it.

"They will constitute almost 40% of the net new households over the next 10 years. And again, to see the magnitude of that, to see how dramatic it was, I think was something worth noting."

The prospects for a substantial easing of affordability problems "are unfortunately dim," said research analyst Rachel Drew.

"In just one year the number of households spending more than half their income on housing increased a startling 1.2 million to 17 million in 2005," she said. "Even if prices or rents soften for a period of time, the nature of U.S. labor markets, the regulatory restrictions imposed on residential development and the fiscal limits of government assistance to cost-burdened households will make affordability a long-term challenge."

"In addition, incomes and wealth stand higher for most households in real terms than 10 years ago. This should translate into solid growth in both new construction and remodeling spending over the next 10 years compared with the last 10."

Until then, one of the most visible issues in the marketplace is the significant increase in foreclosures, especially in areas with economic problems, Mr. Retsinas said, because it is the economy and jobs that are the most important.

That fact suggests the subprime market and adjustable-rate-mortgage-related problems "are legitimate issues," but it would be a misperception to see them as the main drivers of the foreclosure crisis. In the fourth quarter of 2006, homes entering foreclosure increased by about 75,000 compared to the same quarter of 2005.

The report maintains, "Tightening of credit standards in the wake of worse-than-anticipated subprime loan performance is further dampening demand."

"I think the one last question that all of us have is how extensive will these foreclosures be? It's too early to tell," Mr. Retsinas said. "The subprime market is a problem and there was a problem when that happened it would affect the prime mortgage market, but that did not happen. Those spreads are still relatively narrow." (c) 2007 Mortgage Servicing News and SourceMedia, Inc. All Rights Reserved. http://www.mortgageservicingnews.com http://www.sourcemedia.com

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