More Pain Ahead for Housing Markets

Look for new home starts to slide another 33% this year, with further drops in home values.

By Jerome Idaszak, Associate Editor, The Kiplinger Letter

January 29, 2009

Recent encouraging signs in the housing market shouldn't be dismissed. The modest upturn in sales of existing homes in December and a tiny increase in the number of potential buyers checking out a new home this month are welcome, of course.

But don't overestimate their significance, either. After acting as a drag on the economy in 2007 and 2008, housing is now being pulled down by weaknesses elsewhere.

Rising unemployment is shrinking the pool of buyers and increasing the number of foreclosures. Even folks who can get a loan are watching deals fall apart, discovering they can't find a buyer for their current home. Builders say canceled sales remain high.

That's making a sour situation worse. About a third of home mortgage holders are still underwater, owing more on their loans than their homes are worth. Foreclosures could approach 8 million between now and the end of 2012. Up to 23 million mortgages out of a total of about 55 million are considered below prime, held by people whose incomes were overstated, put no money down or had some other deficiency. They're likely candidates to default.

Congress and the Obama administration are working on ways to curb defaults and put a lid on foreclosures. But Thomas Lawler, a Virginia housing consultant, says, "Nobody has come up with a truly effective solution to foreclosures. The solution has to be getting the economy back to growth."

Look for housing starts to slide by another third this year to about 600,000 because of sluggish sales, rising foreclosures and too many homes sitting empty. Sales of new homes -- often under pressure of competing with foreclosed units in the same subdivision -- are headed for about 380,000 this year, which would be a 21% drop following a steep 38% decline in 2008.

Prices will continue to slump for a while longer, at least on a national basis. We expect another 10% decrease on average this year, same as in 2008. Bigger drops are likely in boom areas already hard hit: California, Arizona, Florida and Nevada -- four states that account for about 40% of total housing in the U.S. Actions by the Federal Reserve have resulted in a decline of a full percentage point in fixed-rate mortgages over the past few months. But with unemployment going up, banks are leery about lending.

Stung by losses, banks have tightened up qualifications. Joel Naroff of Naroff Economic Advisers, says, "The Fed is keeping mortgage rates low, but their attempts to free up money have not been overly successful. Until they get more mortgage funds flowing, don't expect any major upturn in the housing market."

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