Housing Rebound: Why It Could Take 20 Years

You know where the housing market has been. You may not want to know where it's headed.

There are tentative signs the depressed housing market may finally be close to bottoming out. That might sound like good news, but hitting bottom doesn't mean an upward rebound will follow anytime soon. Economist Celia Chen of Moody's Economy.com has published a forecast suggesting that residential real estate could take 10 years to recover in most states—and 20 years in Florida and California.

Chen predicts that house prices will stop falling by the second quarter of 2010, which is consistent with what the Federal Reserve and many other forecasters have said. But her longer-term outlook helps explain why many economists are gloomy about the nation's economic prospects for the next several years. Some of Chen's predictions:

By the time house prices stop falling, they'll be down 43 percent from peak prices reached in 2006, as measured by the Case-Shiller home-price index.

That will mark the deepest housing correction since 1890, and probably ever in the United States (meaningful data go back only to the late 19th century). The prior worst housing bust was from 1916 to 1932, when house values fell 37 percent. Beating that dismal record suggests we're no smarter now than in the Great Depression.

Nationwide, price levels won't regain the peaks of 2006 until 2020. In the worst-hit states, Florida and California, the rebound will take until 2030. Five other states won't hit their 2006 peaks until after 2023. Anybody who doubts that it could take that long should consider the real estate bust in Japan, where prices are still down by half from the peaks they reached 15 years ago.

Other states, mainly those where the housing boom was muted, will bounce back faster. Homes in Texas, Oklahoma, and a handful of southern and Farm Belt states could regain peak prices within seven years, after falling by less than 10 percent. If it felt as if the housing boom was passing you by earlier this decade, count your blessings.

Forecasts like this should temper some of the recent hype over the stock market rally and a dip, probably temporary, in the national unemployment rate. If housing remains as depressed as this forecast suggests, it will be extremely hard to mount the kind of recovery it will take to bring back jobs and boost consumer spending. Housing represents a huge chunk of the economy—about 16 percent—and at such depressed levels it would take runaway growth in other areas to compensate for a moribund housing market.

But that's unlikely too, since housing is also a source of much of the personal wealth that fuels consumer spending. The plunge in home values has been the major factor in the evaporation of $14 trillion of Americans' net worth, and that in turn is likely to depress spending for the foreseeable future. In past recessions, a housing rebound has been the spark that helped turn the economy around. This time, we'll need a lot of other sparks.

Disclosure: no positions

Comments

[Tim Plaehn:]

The last up turn in California went from the the early 90's until 2006. I can live with 15 years of price gains.

Aug 13 08:41 AM

[OptimizedPrime:]

Yep, I agree it will probably be decades.

So underwater homeowners are faced with a multi-decade wait to get above water. The adverse effect on personal credit from a walk-away might last 5-6 years at the most.

What do you suppose people are going to choose to do?

I think we all know that the answer is, "walk aways by the millions".

***

It's interesting to ponder the long-term effects this will have on the mortgage market and housing in general.

Here's how I'd see it playing out:

1. Banks must, for now on, assume the FULL RISK of price changes in the market, as opposed to before when they could assume their customers bore most of the risk. Anything past the down payment on the loan will be the bank's downside exposure to a price decrease.

2. From a bundled securities point of view, the risk profile of MBSs will be based not so much on individual credit ratings but rather on individual real estate markets. "People" will ALL be assumed to be deadbeats: you're counting on the local markets ONLY.

3. Thus banks will need to require larger down payments for more volatile markets.

4. This will in turn put a natural damper on high-flying markets. What goes up, "could" come down... Thus banks will charge higher interest rates and require bigger down payments.

5. Price increases will thus cause down payment requirements and interest rates to increases, in turn putting downward pressure on prices.

6. Markets will balance themselves out and become (more) Bubble-proof.

And this might be a good thing...


OP

Aug 13 11:03 AM

[crewman:]

There are two Californias....coastal and inland. For inland markets like the Central Valley and many Inland Empire locations, the "decades" prediction is probably correct. For coastal counties, it's more like 3-5 years. In the coastal counties, we are only building one home for every 10 people who'd like to buy one. In other words, as long as 10% of the CA population is doing well and making money - they'll have the means to buy a house. When we get to a point where 50% of the CA population is back doing well and making bonuses and commissions...then you'll have 5 people bidding on that one home that was built for them. When this happens (I think in 3-5 years) you'll get brisk appreciation again. Please don't take me for a RE bull, I'm actually bearish. But in coastal CA, you have to be realistic about the unique supply/demand forces here.

Aug 13 02:39 PM

[Troyhector:]

According to various reports on the analysis of the real estate trends, residential markets hit could hit quite a low during 2010 and are expected to flounder during late 2010 or early 2011. Cash flows get crimped due to delinquencies, property values and foreclosures causing the global economy to limp through difficult times.

Financing of properties is going through a huge restructuring process and the pricing should readjust to the new trends affordable by people. This transition is causing a lot of industries and job sectors to be totally wiped out.

Due to various disconnects in the industrial chain, job markets in various segments are drown, property owners are sunk in debts and lenders are sceptical to lend and bail out people from the difficult situation. The income to afford to repay loans is declining highly.

Only when the restructuring gets stable and the pricing reconciles and reaches an acceptable and affordable level, the industry is expected to recover. With the housing market in great trouble, moderately-priced apartments have become the core buy.

Read More: www.housingnewslive.com

Aug 13 05:40 PM

[Russ Wetherill:]

Much like hurricane Katrina, the clean up after this financial storm is going to last a great deal longer than the storm itself. The fact of the matter is that we have yet to emerge from the swirling economic chaos caused by a decade of debt-financed economy.

From the stock markets perspective, the last six months of 2009 seems to be the eye of the storm - a period where things seem to be "less bad;" or, at least are becoming worse at a slower rate. But, trepidation remains in the knowledge that, just over the horizon, the latter half of the storm is rapidly approaching. These winds will take the form of rising mortgage defaults driven by job losses and Option Arms resets and recasts.

Once this storm has passed in 2012, we can survey the damage and begin to assess how large the recovery effort will be, and how long it will take. A decade seems like the minimum amount to repair personal and public balance sheets, retrain housing industry workers for new vocations, institute financial and mortgage industry reforms, and get back to living relatively worry free again.

Aug 14 11:07 AM

[CaseyM:]

Why is it that "recovery" is considered a return to inflated bubble valuations? In some sense prices are "recovering" lower to their true levels where they have a rational relationship to incomes and to comparable rents.
Sure, for anyone who bought at the top of the bubble, it may take 10-20 years for them to break even. Eventually we'll see inflation and it will hardly seem like breaking even anymore.
At the height of the dot-com bubble Microsoft stock was at almost $60, does that mean it won't "recover" until it gets back there just because someone may have purchased at that price?

Aug 14 02:39 PM

[Tesh:]

Why do we even bother with the silly metrics of "percent off the peak" when we talk of "recovery" of the housing market? The *peak* was an aberration, and getting back to sensible valuations *is* the recovery.

Aug 14 04:19 PM

[User 471818:]

All real estate will be right side up in a year or so. That includes all condos, commericial, residential, etc. There is a simple fix to do this: devalue the dollar by 30-50 percent. There will not be any debate over doing this; rather it will just happen. Look for an unexpected bank holiday on a Monday for a clue it is going to happen.

Aug 14 06:16 PM

[Bodz:]

"Leading indicators, however, combined with a benign interest rate outlook, suggest that while housing still has farther to go before it hits bottom, the worst of the decline in the housing market is likely over."
Celia Chen Dec 8, 2006.

Interesting to see her now trying to outrace her fellow economists, almost all of whom missed the severity of the housing bubble, to the "this will be worse and last longer than anyone thinks" scenario.

Aug 14 07:37 PM