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By Justin Dove

Tuesday morning, the Commerce Department released figures showing builders began work on a seasonally adjusted 571K homes in August. This translates into a five-percent decline from July and makes up less than half of the 1.2 million starts considered consistent with healthy housing markets.

A survey conducted for MacroMarkets LLC, a financial technology company co-founded by Yale University economist Robert Shiller, found that economists expect home prices to drop 2.5 percent this year and rise only 1.1 percent annually through 2015. Currently, prices are down nearly 32 percent from their peak in 2005.

If this is the case, economists are essentially forecasting a lost decade for the housing market

Not only will millions of homeowners be left with little or no equity in their homes, but these repercussions will also be felt for consumers and the broader economy for a long time to come.

A Few Current Problems With the Housing Industry

  • Twenty percent of Americans with a mortgage owe more than their home is worth.
  • Nearly $7 trillion of homeowners’ equity has been lost in the bust.
  • Homeowners’ equity as a share of home values has fallen to 38.6 percent from 59.7 percent since 2005.
  • Banks hold nearly a half million homes on their books, but over four million additional loans are considered in some state of foreclosure or seriously delinquent.
  • Even while mortgage rates have fallen to their lowest levels in decades, applications submissions are at a 15-year low. Financing remains available to only “the most credit-worthy purchasers.”

Do not expect declines in prices to be as drastic as they were three years ago. However, even small decreases can feed into the psychology, forcing more homeowners in the red and perpetuating the snowball effect with foreclosures. That, in turn, could prompt more credit tightening by lenders.

This environment would be detrimental to the currently shrinking number of home buyers and decreases the pool of buyers needed to purchase bank-owned foreclosures. Mortgage-finance giants Fannie Mae and Freddie Mac sharply tightened their standards in 2008 and many banks continue to do so because of concerns they will be forced to buy back defaulted mortgages.

Another issue that weighs in on the real estate industry is the problem that home prices have been beaten down for such a long period of time that many people are skeptical that home improvements will increase the value of their property. Home owners now believe that prices are dropping independent of whatever improvements they make, so why do it?

Housing Market Analysis and a REITs Play

The housing bust is weighing on the economy in part because bank-owned foreclosures have sidelined new construction, a traditional employment engine following a downturn. Housing markets are also hurting because possible first-time homeowners are taking a back seat due to all the economic doom and gloom that’s prevalent all over the 24/7 news cycle. Current homeowners, meanwhile, don’t have enough equity to move, so the ever important “trade-up” market is stalled. That has left housing heavily dependent on investors buying homes at discounts with cash.

As we have stated in previous articles, renting will be “king” for a long time to come. Real estate income trusts (REITs) should be a play in this market. Look at the Vanguard REIT Index (VGSIX).

Disclosure: Investment U expressly forbids its writers from having a financial interest in any security they recommend to our subscribers. All employees and agents of Investment U (and affiliated companies) must wait 24 hours after an initial trade recommendation is published on online - or 72 hours after a direct mail publication is sent - before acting on that recommendation.

Source: A Lost Decade In The Housing Market