Housing Recovery in 2011, Er, 2015

The last time I reported on the housing market was in October, and since then, not too much has changed. In short, demand remains anemic and supply continues to expand. Housing prices are teetering on the brink of decline, and it doesn’t look like the housing market will stabilize for at least another year or two, at the earliest.

According to the latest data, home prices have decreased more than 25% nationwide from the peak in 2008, including 4% over the last twelve months. 23% of mortgages are underwater, For the month of October, the National Association of Realtors Pending Home Sales Index increased by 10.4%, compared to a 1.8% decline in the previous month. On the supply side, privately-owned housing starts in October were at a seasonally adjusted annual rate of 519,000, a decline of 11.7%. Meanwhile, the so-called shadow inventory (of unlisted foreclosed properties) has increased to 2.1 million units. “Together with the 4.2 million homes on the market, it would take 23 months to work through supply at the current pace of sales, up from 17 months a year ago.”

As for interpreting that hodgepodge of data, there are a few numbers that stand out. First is the 23% of mortgages that are underwater nationwide, including 80% in Las Vegas and 68% in Phoenix. Basically, a significant number of borrowers that might otherwise want to sell their homes (at a loss) probably can’t obtain approval from their lenders to do so. Of equal significance is the explosion in the shadow inventory, which is only set to continue expanding as lenders resume foreclosures. On the other hand, I don’t think the Pending Home Sales Index is worth dwelling on, since it’s still hovering around its 2008 level. Besides, anecdotal evidence suggests that the “tax credit hangover” (in which the expiration of the federal government tax credit was followed by a precipitous decline in homebuying) has not yet ended, and that most buyers are still staying out of the market.

What do the experts predict? As I reported last time, Morgan Stanley, “expects 2011 home prices to fall 5% to 10% from this year with four years of flat prices after that.” According to Freddie Mac’s Chief Economist, “Macroeconomic factors suggest the U.S. housing market will improve in 2011, Freddie Mac’s chief economist.” Ben Bernanke, Chairman of the Fed, has this to say: “Housing…[is[ already very weak. And [it] can’t get much weaker. And so another decline is relatively unlikely.”

What do I think? I tend to agree with Morgan Stanley’s assessment- that 2011 will be a terrible year for the housing market. In hindsight, prices were stable in 2010 only because of the combination of federal tax incentives and low interest rates. As a result, demand was merely pulled forward from the future, not created anew. The continued decline in housing prices that should have taken place in 2010 was therefore postponed, to 2011 and beyond.

In the long-term, the housing market can only begin to achieve a real recovery when supply and demand meet equilibrium. Even if homebuilders put a stop to all activity (as they already have in some parts of the country), the gap between supply and demand will remain significant for the immediate future. Demand, meanwhile, will only recover when the economy stabilizes and unemployment declines.

In the end, timing the market is impossible. If/when home prices begin to rise for good, it will probably trigger a flurry of activity as all of the “shadow buyers” rush to compete with each to close at attractive prices. For now, buyers can continue to be picky, and will continue to have the upper hand (in most areas) in negotiations with sellers.