Putting the best face on the subprime crisis, multi-billion dollar losses, inflation risks recession fears, and other equally distressing headlines dominating the financial news today, you might conclude that these are certainly interesting times. But then, you might also recall the old Chinese curse: “May you live in interesting times,” which tells us that interesting times are also often unpleasant and almost always uncomfortable.
That is certainly true of the housing market, which continues to demonstrate dramatically that the law of gravity (what goes up eventually comes down) applies eventually to home sales and home prices, too. Sales of new and existing homes, median home prices, new home starts and permits for future starts all continued their downward spiral in December, setting negative records and leading economists to debate where we are in this all-too-interesting real estate cycle. The optimists (the nation’s Realtors are almost always in that corner) think the bottom is near, but the consensus among other analysts seems to be that the end of this downturn is nowhere in sight. “Free fall” has become the adjective of choice to describe a decline that is likely to continue at least through the end of this year, and (depending on which forecasts you believe), possibly well beyond.
One home builder offered this refreshingly straightforward explanation of the problem: “We built too many homes.” That may be somewhat over-simplified, but it’s still a good starting point for summarizing the grim national statistics. New home sales tumbled by 26.4 percent last year, beating 1980 for the industry’s worst performance, and producing the steepest year-over-year decline since the Commerce Department began tracking this information. Only the Northeast edged (barely) into positive new home sales territory, with a 1.6 percent increase; all the other regions posted declines of 26.3 percent or higher.
Going Down
Median new home prices nationally were essentially stagnant last year at $246,900, but industry analysts note that statistic masks the impact of the incentives builders are adding and the rebates they are offering in an effort to breathe life into moribund sales. New home starts – the best ind9cator of future construction activity — plummeted by 25 percent year-over-year, falling to levels not seen since 1980; permits for new construction declined by the same amount (25 percent), reaching the lowest level for that indicator since 1974, and suggesting that a rebound is not likely any time soon. But the decline in construction activity also offers some hope that builders will be able to reduce the inventory of unsold homes that now stands at 9.6 months and counting – at least, that’s what economists at the national Association of Home Builders are emphasizing as they report that home builder confidence levels are still declining.
Evidence of improvement is equally elusive in last year’s existing home sale statistic, which posted their steepest year-over-year decline (13 percent) in more than 25 years. Sales were still the fifth-highest on record, the eternally optimistic National Association of Realtors pointed out, but with a 9.6 months’ inventory of unsold homes, the association’s chief economist, Lawrence Yun, acknowledged, “Buyers have a clear edge over sellers in many markets.”
Also unsettling to analysts and to many homeowners, median home prices declined by nearly 2 percent last year, according to NAR statistics, the first year-over-year price decline in more than four decades. A Merrill Lynch report predicts that prices nationally will decline by 15 percent this year and by another 10 percent in 2009, a forecast the NAR’s Nun rejects as “way too pessimistic” and “unprecedented.” Yun likes the NAR’s forecast better – stagnant prices this year, with a projected 5.3 percent drop in the first quarter offset by small gains in the third and fourth quarters of the year, leading to stronger sales and rising prices in 2009.
In Massachusetts, single-family home sales declined by 8.4 percent last year, reaching their lowest level in 15 years, while the median home price dropped to $325,000, 5 percent below the prior year and 10 percent below the 2005 peak of $345,000, according to data compiled by The Warren Group, parent company of the Banker & Tradesman. Elsewhere in New England, although sales in Maine and Connecticut declined last year (by 10 percent and 8.1 percent, respectively), prices remained just barely above par, increasing by close to 1 percent in both states.
Looking for Help
With a housing recovery unlikely before the end of this year, even under the most optimistic forecasts, and much further off according to others, housing industry executives are focusing intently on two initiatives:
- An economic stimulus plan designed to avoid a recession, or cushion its impact, by funneling tax rebates to individuals and businesses; and
Efforts to hold back the foreclosure tide that threatens to engulf thousands of borrowers and their communities by modifying the loans of at least some of the subprime borrowers who are in danger of losing their homes. - Despite strong bipartisan support and an acknowledged sense of urgency, the prospects for speedy passage of the stimulus package are uncertain, as the Senate is pushing a broader assistance plan than the one the House approved quickly by a large majority.
On the loan modification front, recent reports indicate that lenders are making some progress in working with struggling borrowers. But with foreclosure rates still skyrocketing and nearly 1.8 million subprime loans slated to re-set at higher rates this year, consumer advocates and many legislators say more aggressive measures are needed.
The Federal Reserve, meanwhile, is doing what it can to address recession fears. Putting inflation concerns on the back burner, for now, the Fed’s policy-making Federal Open Market Committee has slashed its federal funds rate (the rate at which banks lend money to each other) by 1.25 percent in two back-to-back moves, holding out the prospect for further cuts if conditions warrant. But the Fed’s actions have fallen into a “damned-if-you-do-and-if-you-don’t” vise, with some critics complaining before the first emergency rate cut that Fed Chairman Ben Bernanke was not acting quickly or aggressively enough to forestall a recession, and others complaining after the cuts that the rate reductions were unnecessary and risk igniting an inflation firestorm, leaving Bernanke, no doubt, among those pondering the curse of living in interesting times.
Looking for Good News in all the Wrong Places
Just when you think the news about the housing and credit markets can’t get any worse, it does. The most recent addition to the “worse and worser” category came from Freddie Mac, which announced an eyebrow-raising $2 billion loss in the third quarter – its largest quarterly loss ever – resulting from rising defaults and charge-offs on the mortgages the company holds in its portfolio.
Freddie’s loss, as unexpected as it was unwelcome, demonstrated that the questionable underwriting that toppled the subprime market wasn’t entirely confined to that sector, but managed to seep into the presumably more pristine portfolios of lenders and secondary market leaders, like Freddie Mac, that declined to venture into the subprime swamp.
Some analysts characterized Freddie’s announcement as “the other shoe” dropping on the credit markets, which might have been more reassuring if not for the increasing signs that the economic body shedding that footwear may be a centipede. Freddie’s announcement landed on credit markets already reeling from announcements that financial industry giants, including Merrill Lynch, Citigroup, and H&R Block, were writing off billions of dollars in losses related to their exposure to subprime-backed securities.
As Freddie’s experience indicates, maintaining a safe distance from the subprime mess won’t protect you from the toxic waste it has produced. Concerns are mounting that the weakening housing market, compounded by continuing turmoil in the credit markets, will severely hamper economic growth and could produce a recession next year. Although only 18 percent of the economists responding to a recent survey put the recession risks at more than 50 percent, that is up from 11 percent who shared that pessimistic view just 12 months ago. The difference reflects the widening impact of the subprime mess on the borrowers struggling with re-setting loans, on lenders struggling with defaults and foreclosures, on prospective buyers, who are finding it more difficult to qualify for loans, and on the housing market, which continues to sag under the accumulated weight of unsold homes, declining home values, and tightening credit standards.
If you’re looking for good news, you won’t find any in the most recent housing data. Sales of existing homes declined nationwide by 13.7 percent in the third quarter compared with the same period last year, according to the National Association of Realtors (NAR). Digging deeply to find a silver lining in the statistical clouds, the NAR pointed out that median home prices actually rose in 93 of the 150 markets surveyed. But analysts unconstrained by the need to spin the numbers pointed out that the increases, where they occurred, were negligible, while the declines (in what were previously the hottest markets) were in the double-digits.
The Standard & Poor’s Case/Shiller index of home prices, covering 20 major markets, declined by 1.7 percent in the third quarter – significant, Robert Shiller, chief economist at MacroMarkets LLC, said in a press release, because “this was the largest quarterly decline in the index’s 21-year history,” and because the year-over year decline (4.5 percent) represented the second consecutive record low year-over-year reading for the index. Since peaking in the summer of 2006, home prices nationally have declined by 5 percent, according to this closely-watched market barometer.
In Massachusetts, single-family home sales declined by 5.5 percent in the third quarter while the median selling price fell by 4.6 percent, according to statistics compiled by The Warren Group. Condominium sales fell by 6.4 percent, to the lowest level in the past five years, while median condo prices fell by 3 percent compared with the same three-month period last year.
It is possible, if you try very hard, to find some positive indicators. For example, the Census Bureau reported 2.07 million homes for sale nationally in the third quarter, indicating that the rate of increase in the inventory of unsold homes appears to be stabilizing. But that still represents an 8 month supply at the current sales pace, and “there’s no way that signals an end to the housing downturn,” David Seiders, chief economist for the National Association of Home Builders, noted.
When will the downturn end? No one knows for certain, although the consensus clearly is not any time soon. The Mortgage Bankers Association predicts that it will be the end of next year at the earliest before the sun breaks through the housing clouds; other forecasters don’t see any improvement until well into 2009. The Office of Thrift Supervision (OTS) isn’t trying to guess a timetable, but the agency has warned thrift institutions to expect a “prolonged correction” in the housing market.
With more than 2 million subprime borrowers expected to lose their homes to foreclosure as their loans reset over the next 8 months, and an increasing number of economists now convinced that the economy is more likely to slip into a recession than to avoid one, the critical question may not be when the downturn will end, but how much worse it will get before the recovery begins.
