What Does A Recession Mean For Housing?
The Dow Jones Industrial Average promptly plunged 680 points. Apparently, the recession is a surprise to investors.
Oh, ye of little faith.
Recessions typically last about 10 months, if information dating back to post-World War II can be trusted. Two of the last eleven recessions have dragged on as long as 16 months, while several have lasted only eight months.
If history is any guide, we’re over the worst of it - 11 months into a recession, which means we could have as long as five more months to go before the markets, and bearish sentiment, turn favorable – just in time for spring housing sales.
April showers could mean lots of flowers in May. Or June. Or July.
“It’s what the economic forecasters say,” says Smith. “and part is a result of the solution on monetary side of the economy. The Treasury and Federal Reserve have a number of solutions for liquidity, and we think that’s starting to occur, and there will be additional stimulus to the economy. Barack Obama has outlined an ambitious approach for counter recessionary moves, and the forecast is for the recession to end between second and third quarter of 2009.”
How does that relate to housing? That depends on how the housing recession is quantified.
The national median price peaked in July 2006, but sales peaked in September 2005.
“We had an annual rate of 7, 25 million existing home sales in September 2005,” explains Smith. “Now, as of October 2008, we have 4.98 million home sales on an annualized basis. Sales have been in the five million range for the last 10 months and have not declined further, so we think we are sliding along the bottom and that a recovery will occur. We’re looking for housing to pick up in terms of sales of June, July or August 2009.
What about pricing? For existing homes, prices are down about 20 percent from the July 2006 peak. The median was $230,100, and has declined to $183,300 in October 2008.
“Most economists feel most of the price decrease is over,” says Smith. “There are approximately 10,000 zip codes in the country (mini housing markets,) and 20 percent of major markets prices have started to increase a little bit. We see prices starting to recover, and will recover in the third quarter 2009.”
The recovery of housing, according to the NAR, will proceed with the recovery of the economy.
Much of the price decrease is caused by foreclosures and short sales, and the NAR sees that government programs will ameliorate the short sales situation. “We see the short sale problem starting to decline the third quarter of next year,” says Smith. “The data we see that housing is very affordable, both in terms of price and interest rates and that price and interest rates.”
Interest rates are currently in the 5.5-5.8 percent range for 30-year, fixed rates. Only a month ago, rates were in the 6.2 percent range. The decline in interest rates, plus the low median price of $183,300 should make homebuying attractive. A year ago, home prices were $206,700 – that’s an 11 percent price decline.
Credit availability has been limited, and banks simply weren’t making loans, which accelerated the housing decline, but the tight credit conditions that prevailed two months ago have eased. “We’ll see an upturn in the market but it takes a couple of months to turn. At this moment, we won’t see a major upturn until the third quarter next year until the credit programs have an increased effect,” forecasts Smith.
The National Association of Home Builders has tracked housing starts (new contracts signed between builders and customers) since 1978. The first housing recession on record began in 1979 after a banner year of two million home starts. The bear ended in 1983. The next time new homes reached 2 million starts was in 2005, also the beginning of a bear market in 2006.
With few exceptions, such as the bear market that began in 1988 and ended in 1992, new home recessions have been extremely brief or of one-year durations.
Another bear market began in 1988, following the savings and loan crisis, and ended in 1992.
Between 1978 and 1982, existing home sales fell 50 percent. Inventories at their highest were 11.5 months on hand, according to the NAR.
Since September 2008, inventories have dropped by nearly one month on hand.
Are consumers responding? According to Credit Suisse, the estimated mortgage payment on the median-price home is 16.7 percent of median household income, down from 21 percent during the summer. That’s well below the long-term average of 23 percent from 1981 to 2007.
In other words, housing is the most affordable that it’s been since February 1994, when the median mortgage was 18 percent of the median income.
It appears that housing is in an overcorrection, and that pent-up demand may create a mini-boom by the end of 2009.
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