NEW YORK, NY -- The nation is in the throes of a housing downturn that is shaping up to be the worst in a generation, finds The State of the Nation's Housing report issued this week by the Joint Center for Housing Studies of Harvard University. While the falloff in housing starts, new home sales, and existing home sales already rivals the worst downturns in the post World War II era, home price declines and mortgage defaults are the worst on records that date back to the 1960s and 1970s.
"The slump in housing markets has not yet run its full course," concludes Nicolas P. Retsinas, the director of the Joint Center for Housing Studies. "Mortgage rates have barely responded to the aggressive easing of the Federal Reserve, the supply of for-sale vacant units continues to grow, and much tighter underwriting is locking many would-be homebuyers out of the market. With home prices falling in most metropolitan areas, homeowners are tightening their belts, remodeling less, and staying on the sidelines."
The report observes that the number of homeowners paying more than half their income on housing rocketed from 6.5 million in 2001 to 8.8 million in 2006. This reflects looser lender enforcement of debt-to-income caps and the widespread use of mortgages that have been resetting to higher payments. With so many stretched thin and home prices falling in many areas, foreclosures are skyrocketing. The number of homes entering foreclosure nearly doubled to 1.3 million in 2007 from about 660,000 in 2005. The report concludes that these high levels of foreclosures will continue to exert extreme downward pressure on prices, especially in low-income and minority areas, where riskier subprime loans are most heavily concentrated.
The problems created by overheated housing markets going bust are not confined just to housing, the report finds. "As losses on securities backed by subprime mortgages escalated, few investors wanted to purchase them, the market value of these securities plummeted, and the Federal Reserve had to take unprecedented steps to prevent the failure of major financial institutions," explains Eric S. Belsky, the Center's executive director. "This has tightened the availability of credit well beyond the confines of just the mortgage market. On top of this, declines in residential construction shaved nearly a percentage point from national economic growth in 2007."
The study presents a dispiriting picture of how severe and structurally ingrained housing affordability challenges have become. By 2006, 17.7 million householdsx97about 15.8 percent of all householdsx97were spending more than half their income on housing, an increase of 3.8 million just since 2001. Even 34 percent of households with incomes equivalent to 1-2 times the federal minimum wage, and 15 percent with incomes equivalent to 2-3 times this wage, spend more than half their incomes on housing. With the economy spinning out a growing proportion of full and part-time jobs with wages in these ranges, prospects for a meaningful reduction in affordability problems remain dim.
This year's State of the Nation's Housing report finds that demand for new homes has dropped well below projected long run demand. House price deflation, tight credit, and consumer concerns over the direction of the economy have kept buyers at bay and some households from forming. The somber conclusion is that if the economy slips into recession or job losses keep racking up, household growth and homeownership demand could fall even more.
On the other hand, the report sounds a more optimistic note about the medium to long-term. "At some point demand will bounce back," notes Retsinas. "Historically, housing markets recover only after the economy has entered a recession and a combination of falling mortgage interest rates and house prices have improved housing affordability. It is difficult to judge how far away from these conditions we may be. It will take longer this time to rebound given the unusually high levels of foreclosures and constrained credit markets." Barring a prolonged period of serious economic decline, however, the report concludes that the outlook for household growth is about 14.5 million over the next ten years. The main risk to the long-run outlook, the report notes, is a dip in the level of immigration from its recent 1.2 million a year pace due to weaker labor markets.
To view the report, go to: http://www.jchs.harvard.edu/son/index.htm
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