The Housing-Market Recession Is Not Over

By Amy Hoak
Wednesday, June 9, 2010

Why you shouldn’t be overly optimistic about real estate right now

After years of hearing how home prices are plummeting and foreclosures are mounting, consumers want to feel hopeful about the housing market — but maybe they’re being too optimistic.

In a presentation to the National Association of Real Estate Editors in Austin, Texas, last week, Stan Humphries,’s chief economist, pointed to four myths he said consumers are latching on to as they try to make sense of recent housing statistics.

The four myths:

1. The housing recession is over. It’s not, Humphries said. He estimates the bottom in home prices won’t come until the third quarter, at least from a national perspective. Doug Duncan, chief economist at Fannie Mae and also a speaker at the conference, agreed with that estimation.

2. After markets hit bottom, prices will rebound to boom levels. Not going to happen, at least for a while, Humphries said. “Once we hit bottom, the bottom is going to be a long and flat affair across the markets,” he said. “What we’re going to see once we hit bottom is the second phase of the housing recession… that second phase is one of being flat.”

3. The worst of the foreclosure mess is behind us. More wishful thinking, according to Humphries. He estimates foreclosures will peak later this year, then remain elevated for a while. Rick Sharga, senior vice president of RealtyTrac, an online marketplace for foreclosure properties, said he doesn’t envision foreclosure activity stabilizing until late 2011.

4. The tax credits saved the housing market. With or without a tax credit, those who bought would have done so anyway, Humphries said. “The biggest impact [in home sales] we believe were low prices… low interest rates and the unsung factor here is the ramped up lending by the Federal Housing Administration.”

Still, it’s easy to understand why many homeowners want look on the bright side.

“They went from what everyone thought was a lucrative asset to something worth a lot less than they owed on it,” said Douglas Culkin, president of the National Apartment Association, in a phone interview. “We all want it to get better,” he said.

Some want to finally sell their homes and move on with their plans. And homeowners are tired of thinking their houses are bleeding equity, losing value like a new car driving off the dealership lot.

As for prospective home buyers, even if consumers are feeling confident enough to take an extra trip to Wal-Mart these days, many are not going to jump in and spend on a large-ticket item like a house, said Gail Cunningham, spokeswoman for the National Foundation for Credit Counseling.

“The reality of the situation in which we find ourselves today has sunk in with people,” she said in a phone interview. “If a foreclosure hasn’t been a part of their life, it has been a part of someone else’s life… and they’ve seen the pain that inflicts on the family.”

That perception isn’t going to fade quickly.

It makes sense to be gloomy

Despite statistics showing some housing-market improvement, there’s still good reason for pessimism.

The most recent Case-Shiller report showed prices rose 2.3% in March, compared with March 2009. The National Association of Realtors recently reported that in April the median existing home price rose 4% in the past year; existing home sales were up 7.6% in April to a seasonally adjusted annual rate of 5.77 million.

While it’s too soon to quantify the degree of the effect, the deadline for the home-buyer tax credit likely played into the numbers. Contracts needed to be in place by April 30 to qualify, and some economists say that incentive made buyers move earlier than they would have otherwise. Any bump from a temporary credit is soon over.

But there is another important reason to take improving numbers with a grain of salt: What people are calling “shadow” inventory.

That’s primarily inventory that banks are holding, homes that have been foreclosed on but haven’t yet hit the market. There are also severely delinquent homeowners who haven’t entered foreclosure yet, but who will eventually get there. Right now, many of them are trying to work out some sort of mortgage modification.

Then there’s this: The group of “sidelined sellers,” or people who want to sell their homes but have waited for the storms to pass, Humphries said. About 7% of homeowners — representing more than 5 million homes — fall into this category, and are very likely to try and sell their home in the next year if there are signs of improvement, according to Zillow estimates.

Additional inventory on the market slows any housing recovery.

Personal economies

Despite Humphries’ theory that Americans are too optimistic on housing, there are plenty who still remain cautious. And if they’re not looking at housing statistics with a skeptical eye, their personal economies are providing a reality check.

Most obviously, salaries for many Americans have been frozen or cut, and then there are the large numbers of people completely out of work, Culkin said.

According to a recent NFCC survey of more than 2,000 consumers, 49% said that if they were to attempt buying a home today they’d never be able to save enough money for a down payment. Coming up with a down payment has traditionally been problematic for first-time buyers, but it has spread to those who have owned before; many people are underwater in their mortgages, making it harder for them to get funds to move to another house.

Plus, today’s buyers aren’t only concerned about the ability to get a home but also their ability to keep it, said Duncan, of Fannie Mae. In the long run, that attitude is a good thing for the economy, he said.

“It’s not just that we want a house,” Duncan said, “but we will delay getting that house until we can afford to get it and afford to keep it.”

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