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Monday, June 22, 2009

Harvard on Housing 2005

by Calculated Risk on 6/22/2009 01:17:00 PM

Just so you know ... I used to make fun of the Harvard reports.

Here is the Harvard State of the Nation's Housing 2005 report (ht curious)

The unprecedented length and strength of the boom has, however, fanned fears that the rate of construction far exceeds long run demand. Although averaging more than 1.9 million units annually since 2000, housing starts and manufactured home placements appear to be roughly in line with household demand. As evidence, the inventory of new homes for sale relative to the pace of home sales is near its lowest level ever. Given this small backlog, new home sales would have to retreat by more than a third—and stay there for a year or more—to create anywhere near a buyer’s market.

Moreover, the US mortgage finance system is now well integrated into global capital markets and offers an ever-growing array of products. This gives borrowers more flexibility to shift to loans tied to lower adjustable rates in the event of an interest-rate rise. Although adjustable loans do increase the risk of payment shock at the end of the fixed-rate period, borrowers are increasingly choosing hybrid loans that allow them to lock in favorable rates for several years.

With homes appreciating so rapidly over the last few years, there is concern that house price bubbles have formed in many markets. Clearly, ratios of house prices to median household incomes are up sharply and now stand at a 25-year high in more than half of evaluated metro areas.
Whether the hottest housing markets are now headed for a sharp correction is another question. The current economic recovery may give house prices in these locations the room to cool down rather than crash if higher interest rates slow the sizzling pace
of house price appreciation. Moreover, in several metropolitan areas where house prices have appreciated the fastest, natural or regulatory-driven supply constraints may have resulted in permanently higher prices.
For now, though, house prices should keep rising as long as job and income growth continue to offset the recent jump in short term interest rates. House prices would come under greater pressure, however, if the economy stumbles and jobs are lost.
There were plenty of warnings and caveats in the 2005 report (covers through 2004), but for the most part they missed the housing bubble and the coming crash.

And from the 2006 report (covers 2005):
[T]he housing sector continues to benefit from solid job and household growth, recovering rental markets, and strong home price appreciation. As long as these positive forces remain in place, the current slowdown should be moderate.

Over the longer term, household growth is expected to accelerate from about 12.6 million over the past ten years to 14.6 million over the next ten. When combined with projected income gains and a rising tide of wealth, strengthening demand should lift housing production and investment to new highs.
Fortunately, most homeowners have sizable equity stakes to protect them from selling at a loss even if they find themselves unable to make their mortgage payments. As measured in 2004—before the latest house price surge—only three percent of owners had equity of less than five percent, and fully 87 percent had a cushion of at least 20 percent.
The greatest threat to housing markets is a precipitous drop in house prices. Fortunately, sharp price declines of five percent or more seldom occur in the absence of severe overbuilding, dramatic employment losses, or a combination of the two. The fact that these conditions did not exist and that interest rates were so low explains why the housing boom was able to continue without interruption when the recession hit in 2001. With building levels still in check and the economy expanding, large house price declines appear unlikely for now.
Despite the current cool-down, the long-term outlook for housing is bright. New Joint Center for Housing Studies projections—reflecting more realistic, although arguably still conservative, estimates about future immigration—put household growth in the next decade fully 2.0 million above the 12.6 million of the past decade. On the strength of this growth alone, housing production should set new records.