Lasting Housing Woes Paint a Grim Economic Picture

The light at the end of the housing-market tunnel keeps receding. More price declines are coming.
Don't hold your breath for an upturn in the housing market. Improvement seems just as distant today as it did a year ago. That's bad news for the economy as a whole. As long as housing prices, sales and construction continue to flag, gross domestic product growth can't make much headway. Too much of the economy rests on consumer spending, and too much of that is tied to consumers' sense of wealth and well-being. With home values still sinking and job growth dwindling, their confidence is shaky and spending will be less than robust.
The housing market won't hit bottom for months yet. The industry won't turn the corner until midyear at the earliest and probably not until closer to the end of the year. And when the bottom does finally appear, it's likely to stay for a while. An actual upturn will be painfully slow to manifest. Mark Vitner, senior economist with Wachovia Corp., says, "Economists are talking about a bottom late this year, but most people will say things don't feel much better. It will be 2011 or 2012 before we return to conditions that people think are strong."

For housing to return to good health -- with the solid housing starts and sales of new and existing homes near the rates seen in the late 1990s, if not the red-hot figures of 2004 and 2005 -- it's likely to take at least three more years.
For now, the housing sector is caught in a sickening downward spiral. New construction is still much too high. At 2.5%, the ratio of vacant unsold homes to total homeownership is 50% greater now than it had been for 20 years. There's an excess inventory of up to a million homes. To work that off, housing starts must drop by an additional 25%, to about a million a year. But we expect starts of 1.2 million or so this year, down just 11% from last year's figure of 1.35 million.
One reason: Too much of builders' money is tied up in development -- the cost of buying finished lots, impact fees and permits, building roads, installing water and sewer lines and so on. To keep cash flowing and minimize losses, they keep building homes and hoping to sell them. Mario Ricchio, housing industry analyst with Zach's Investment Research, says, "If builders could shut down for two years, they would eliminate all the overhang. Of course, that's not going to happen. They have to generate cash flow."
More foreclosures will worsen the problem in the short term. Two million homeowners face a reset of adjustable mortgages both this year and next. The pressure from that, plus a weak job market, will keep 2008 foreclosure filings high.
Still, there are glimmers of hope: More-aggressive price cutting is taking hold. Builders are now routinely trimming prices by 10% and throwing in upgrades -- high-end appliances, granite kitchen counters, hardwood floors and so on -- worth an additional 10%. Sellers of existing homes are finally becoming more realistic and lowering their asking prices. A Las Vegas home, for example, listed at $910,000 a few months ago is now listed at $750,000. A home in suburban Washington, D.C., originally listed at $750,000 is now on the market for $100,000 less.
Nationwide, prices have about 5% more to fall, and two to three times that much in once-hot metro markets such as Miami, Tampa, San Diego and Las Vegas. Areas that escape the downward pressure altogether will be rare.
Bargain-hunting hedge funds are beginning to sniff around. They're not yet ready to plunge into the market. But some smell a turnaround coming and are preparing to jump in.
And Federal Reserve interest rate cuts will provide a bit of support, easing home-buying and helping to keep the job market lubricated.