Housing Correction Gives Us Plenty to Worry About

Excerpt from Raymond James Economist Dr. Scott Brown's latest economic commentary:

Asked what would lead Fed policymakers to cut rates further, Bernanke said he will pay particularly close attention to three things: the housing market, the labor market, and the credit markets. None of this is in tip-top shape, certainly, but the credit markets may be the biggest worry.

Homebuilding represents a relatively small portion of the overall economy... The drag from homebuilding should fade (the level of residential construction can’t fall below zero). However, the indirect effects will be more important in 2008. For the most part, the housing correction is not a huge problem on a national level – but it is a significant problem for some regions, particularly California and Florida.

While many have fretted over the upcoming resets of adjustable-rate mortgages, falling home prices are a much more important concern. Home price declines threaten to turn many recent homebuyers upside down – that is, owing more than the home is worth. Falling home prices and tighter mortgage credit in turn lead to even weaker housing conditions, further home price declines and even tighter mortgage credit, and so on.

Comments

[Tom B]

I don't want to see home values decline in my area; so far I've been spared that.

I think you need to separate home prices and homebuilders; though the two are highly correlated variables. We have huge problems in my region from excessive development. And, one imagines, a flood of new homes can DILUTE values on existing homes. And reduce quality of life (traffic) and raise--yes, RAISE--property taxes (residential construction uses more services (school, etc.) than it provides. Bottomline: if new dev slows but existing stays strong near me, it's a correction I could live with.

[Malkiel]

"(the level of residential construction can’t fall below zero)."

Well, in effect it can if the loss of housing throughout the economy exceeds the rate of replacement. In the housing recession of the late '80's many northeastern cities saw landlords abandon or torch tenement housing that fell quickly into disrepair and forced municipalities to tear them down. (In fact, empty lots and abandoned buildings from the decaying products of the building boom of the 19th century are the social wallpaper of modern American cities).

In the worst bubble markets there are so many foreclosed properties that many will be torched for insurance or fall into irretrievable disrepair, something unheard of in suburban settings but a real possibility given the foreclosure wave numbers game going on...

[galewhitaker]

It occurs to me that if the price of oil/gasoline keeps spurting up that houses located far from job centers are going to have a difficult time recovering value.

[WAKEUP]

The era of the house-as-investment-pr... is ending. Its death will be drawn-out, and ugly. But its end is clearly approaching. A house will be like a car; a fairly expensive item that one buys for its utility, not for resale, at an enormously inflated price.