Housing Crawling Back

Economic Forecasts

Housing Crawling Back

It looks like sales, starts have found a bottom -- but the market's far from healthy.

At last, the painful slide seems to be over for housing and related industries. After years of declining construction and a similar slump in sales, this year will bring an upturn.

But the suffering is far from over. A long, difficult battle lies ahead, and there will be more casualties before it is finished. The first phase will bring a choppy, uneven period for at least a year, and probably more like 18 months.

On the upside: A big jump in housing starts -- a robust 30% or so more than during 2009. And increased sales of both new homes and existing ones -- about 5.8 million compared with 5.5 million last year. Builders are seeing increased traffic at model homes as the weather gets warmer. But tougher credit standards are frequently eliminating some would-be buyers.

Sponsored Content

The downside: It’ll still be a dismal year. At 715,000, housing starts in 2010 will be the second worst on record, better only in comparison to the rock-bottom 553,000 starts in 2009, and miles away from the 2.1 million starts in 2005. In addition, 2010 home sales will remain 31% below the peak of 8.4 million in 2006, despite the jump this year. Moreover, prices will continue to slip; they’ll wind up down 3% on average from 2009 before flattening out toward year-end.


The fact is, neither supply nor demand is even close to healthy. One in 10 of the nation’s approximately 52 million mortgage holders are in trouble -- with home loan payments more than 90 days past due or in some stage of foreclosure. That will add to the current inventory of 2 million empty unsold homes, roughly double the level during the 1990s. According to Rick Sharga, senior vice president of RealtyTrac, which specializes in following home foreclosures, the pace will slow next year, but it won’t get much better.

The huge volume of distressed sales is particularly troublesome for the new-home market. New-home sales are now just 5% of total sales, only about one-third of the typical 15% of sales.

Making matters worse: A rise in “strategic defaults” -- homeowners choosing to simply abandon their homes and jettison a mortgage that they’ve kept current but that has them owing more than their house is worth. Even though the move will lock them out of obtaining a new mortgage for several years, with home values down as much as 40%, some borrowers think the sacrifice is worth it.

Demand remains crippled. High unemployment is taking a toll as younger folks move back home with their parents or delay purchasing their first home. Consumers’ fear that prices will continue falling also plays a role. No one is eager to buy today if the price might be lower tomorrow.


And Uncle Sam is removing supports that have been propping up demand. The tax credit aimed at new home buyers will expire this spring. As it does, a last-minute spree will jack up sales in the short run, but they’re likely to slump again during the summer. Meanwhile, mortgage rates -- up a quarter of 1% this month -- likely will creep higher as the Federal Reserve ends its loan purchase program. The first true test of how the housing market is faring -- without either an upward boost from a government program or a downward push from the removal of that prop -- will be in the fourth quarter, notes Lawrence Yun, chief economist with the National Association of Realtors.

Housing should pass that test as the economy continues to improve and job growth revives, but don’t expect it to earn a top grade. A solid C is about the best to be expected. But after the past few years, it’s a cause for relief, if not celebration, that at least the trail now heads up rather than down.