Monday, June 23, 2008

Harvard: Bleak Outlook for Housing

by Bill McBride on 6/23/2008 09:02:00 AM

Note: Dean Baker comments on the Joint Center for Housing Studies at Harvard University. As I noted below, the JCHS outlook sections always seem too optimistic, but the report does provide some excellent data.

Hat tip Ben Zipperer in Baker's comments:

When America's housing boom finally ends, don't expect a loud pop.

"It's not going to be a big dramatic event," says William Apgar, senior scholar at Harvard University's Joint Center for Housing Studies.
From the WSJ in August 2005: How Will Home Boom End?
"But comparing the [sudden price declines in the] stock market and the housing market is misleading at best. Because people live as well as invest in their homes, many owners stay put when prices first show signs of softening. This reduces the number of houses on the market and helps bring supply and demand back into balance, forestalling faster and sharper price declines."
-- from a 2005 Joint Center report

"With the slowdown in the entire residential construction sector, the home improvement market has downshifted to a more sustainable rate of growth... The dip in spending should, however, be both mild and short-lived. The fundamentals of remodeling demand remain positive, and the backlog of under-improved homes ensures a ready market for upgrades in the near term. And with home equity still at record levels, owners have the means as well as the motivation to continue to invest in their properties over the coming years."
-- from a 2007 Joint Center report
From the San Diego Union: Harvard report: Housing outlook remains bleak
In a grim report on the weakened state of the housing industry, Harvard University says the United States is caught in a real estate market downturn “that is shaping up to be the worst in a generation.”

The decline in housing construction and home sales “already rivals the worst downturns in the post World War II era,” said the report out today from Harvard's Joint Center for Housing Studies. Price drops and mortgage failures “are the worst on records that date back to the 1960s and 1970s.”
Hopefully the report will be available online soon (check here). The annual Harvard report is a great source of data, however for the last few years I've noted that the report seemed too optimistic.
Despite the “State of the Nation's Housing” report's somber tone, some analysts said it might be understating the problem.

“We have never had anything like this happen,” said Christopher Thornberg, an economist with the Beacon Economics research firm in Los Angeles. “It's a bloodbath. Prices are falling because they are too high. You would have to have prices in California fall 40 percent in order to get back to an historical level of affordability relative to incomes.”
...
“I think it is going to take another year nationwide for us to work through all of our problems in the housing market, at least to make a significant dent,” [Mark Zandi, chief economist for Moody's Economy.com] said. “In some parts of the country, the market will remain depressed well into the next decade. It is going to be a slog.”