|
Harvard Study: Downturn Worst In Decades
By Amilda Dymi
NEW YORK-The slump in the housing markets has not yet run its full course, said Nicolas Retsinas, director of the Joint Center for Housing Studies at Harvard University, commenting on data from the 2008 "State of the Nation's Housing" report.
The persisting downturn is expected to further pressure the economy, the report concluded, because the current 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." Also, not surprisingly, going further the "prospects for a meaningful reduction in affordability problems remain dim."
The JCHS report indicates the nation "is in the throes of a housing downturn that is shaping up to be the worst in a generation," characterized by a continuous falloff in housing starts, new home sales, and existing home sales that even at present already compare to "the worst downturns in the post World War II era."
The report finds home price declines and mortgage defaults are "the worst on record" since the 1960s and 1970s.
"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," Mr. Retsinas said. "With home prices falling in most metropolitan areas, homeowners are tightening their belts, remodeling less, and staying on the sidelines."
The report found 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, reflecting "looser lender enforcement of debt-to-income caps" and the widespread use of adjustable rate mortgages that have been resetting to higher payments.
Meanwhile, as living costs and unemployment rates rise, many families are in financial distress and at the same time facing home prices falling in many areas as well. Consequently "foreclosures are skyrocketing" with the number of homes entering foreclosure nearly doubled to 1.3 million in 2007, up from about 660,000 in 2005.
Findings show problems created by overheated housing markets going bust are not confined just to housing.
"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," according to JCHS executive director, Eric Belsky. "This has tightened the availability of credit well beyond the confines of just the mortgage market."
On top of this, he added, "declines in residential construction shaved nearly a percentage point from national economic growth in 2007."
As to housing affordability and how severe and structurally ingrained this challenge has become for the economy, the prognosis is not optimistic. Findings indicate a "meaningful reduction" in affordability problems is weak given the state of the economy, employment rates and wages.
By 2006, 17.7 million households - about 15.8% of all households - were spending more than half their income on housing, an increase of 3.8 million just since 2001. Even 34% of households with incomes equivalent to one to two times the federal minimum wage, and 15% with incomes equivalent to two to three times this wage, spend more than half their incomes on housing.
Consequently, the 2008 State of the Nation's Housing report finds "demand for new homes has dropped well below projected long-run demand."
The reason is house price deflation, tight credit, and consumer concerns over the direction of the economy, all of which "have kept buyers at bay."
It states, "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."
The report however is more optimistic about the medium to long-term.
"At some point demand will bounce back," Mr. Retsinas said. "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."
He stressed that while it is difficult to judge "how far away from these conditions we may be," he believes it will take longer this time to rebound "given the unusually high levels of foreclosures and constrained credit markets."
More emerging market news
| 
