Is the Housing Recovery Real?

Posted by: Prashant Gopal on October 6, 2009

The U.S. government has been helping to prop up housing sales by keeping interest rates artificially low and by offering $8,000 to renters who purchase homes. A new report by Capital Economics in Toronto suggests that the government has succeeded in giving a needed boost to the market, but the recovery would likely continue with or without the incentives. (The deadline for first-time buyers to take advantage of the $8,000 tax credit is fast approaching. To get the credit, buyers must close by Nov. 30. The National Association of Realtors and the National Association of Home Builders, which say the housing market is doomed without the incentive, are lobbying Congress to extend the credit and expand it to include all buyers).

The “government’s initiatives have kick-started the housing market, but they do not explain all of the recovery,” Paul Dales, U.S. Economist at Capital Economics wrote in an Oct. 6 paper. “… the housing recovery is not going to come to a complete halt if the government incentives are not extended.”

According to Dales’ analysis, the $8,000 tax credit helped convince about 225,000 first-time buyers to make purchases they otherwise wouldn’t have. That’s about 30% of the increase in home sales since January. So, Dales concludes that the other 70% of increased number of home sales likely happened because home prices have fallen to more affordable levels and because interest rates are low.

“The pace of the recovery is likely to slow and it will be many years before either activity or prices climb back to their previous peaks,” Dales wrote.

Irvine, Calif.-based real estate consultant John Burns has a more pessimistic view. He wrote recently that without “government intervention, home prices will plummet, banks … will continue to lose money, and the economy has virtually no chance of increasing overall employment in 2010.”

Burns estimates that 6.94 million mortgages are already delinquent and many of those properties will go back on the market as deeply-discounted foreclosures or short-sales in 2010 and 2011. Others, including Dales, argue that lenders will be cautious about dumping foreclosures on the market because that would drive down prices quickly. It would be more prudent to dribble the listings out slowly.

But Burns says lenders will have so many distressed properties on their books that they will have to start selling sooner rather than later.

“While both the media and stock investors believe that housing has bottomed,” Burns wrote, “they are unaware of the massive supply of homes that are already in the foreclosure process that will certainly drive home prices down even further when they’re sold.”

Reader Comments

norman ravitch

October 6, 2009 3:26 PM

All that programs to encourage home and auto buying for a period of times accomplishe is to create the next period of time as one of plunging sales. There is no evidence that the total number of sales will increase. The only thing that will increase sales of homes is for sellers to lower their prices substantially. Many of them have had paper equity gains which they could well afford to lose.

Toby

October 6, 2009 3:37 PM

"It's the foreclosure pipeline, stupid!"

Burns has is correct, there is a tsunami of foreclosures in the pipeline which has been extended by administrative bottlenecks and attempted rescue plans.

There is no lender cabal scheming to keep foreclosures off the market. These guys aren't that smart. Each lender/servicer is acting in their best interest. And it is often in their best interest to kick the can down the road and delay a foreclosure as long as they can borrow from the Fed at near zero interest rates. Gutting the mark to market rules helped them continue this facade too.

JZ

October 6, 2009 3:45 PM

Many Americans have lost or will lose their homes in the next year. The number one reason for this is the H1-B program and the L-1 Visa program. American Tech workers and Engineers no longer have jobs. They were the base of our economy. Since 2000 we have imported 4.3 million East Indian tech workers to replace American jobs. Those 4.3 million Americans were paying their mortgages, taxes and buying new cars. The lobbyists bought off Congress to allow this insane practice to continue, and put the American economy in the dumps. The recovery will be slow, the first step is to remove all H1-B tech workers and replace them with the qualified Americans, who are now out of work. In order to expedite the process, write your congressperson. Make sure to include the following: I know that you have accepted money and favors from groups that support H1-B visas, but please, for the humanity's sake vote to change this ridiculous policy. We have farmed out too much too fast and we are all suffering from your choices, we are hungry and tired of looking at ghost job postings on the web. Please help us now.

Karl

October 6, 2009 3:48 PM

No! It is not "real". It would be "real" if home prices went back up to where they were in late 2006, but that's not happening. The ones who didn't make any mistakes are suffering from the 'mess' that resulted since then, & up until now. Home prices will continue to go lower because they were over-inflated ever since 2003 when this whole 'mess' was started by lowering the rate to 1% by the Fed. It's interesting that we're not seeing much 'News' about foreclosures, and the rate at which they're occurring. I wonder why. Last I heard there were over 10,000 per day occurring in the USA. Is it still that high? Or aren't we allowed to know? Thank you.

Chris LaVoie

October 6, 2009 4:20 PM

The $8000 satimulus has been helpful in stabilizing the bottom of the market. Itr has also been a big boon to those who have not recently owned but have maintained reasonable credit.

It should be extended another 6 months at least.

To encourage a strong housing market we need to help stimulate the absorbtion of all these foreclosures coming online.

wowlfie

October 6, 2009 5:35 PM

Yes a foreclosure tsunami is on the way and it's hidden just like deep ocean tsunami's can't be seen really until they get close to shore the hidden foreclosures stand to swamp the home industry in the next 24 months if the government doesn't substantially increase the credit to $15,000 and include all buyers. If not, then everyone better watch out

Me

October 6, 2009 6:18 PM

Toby is 100% correct, and I am speaking as one who really wishes he was incorrect. The flood is coming, the lenders aren't smart enough to deal with it, and mark to model is propping the whole system up...

O'Herlihy

October 6, 2009 8:05 PM

While there may be a tide of foreclosures coming, remember that most of these houses are not in very good shape. They are often stripped down and sometimes trashed. This limits to some extent how much they drag down the price of other homes.

ZJ

October 6, 2009 9:57 PM

JZ- actually it's the educated skilled workers on H-1B which have the most purchasing power who can buy houses here. Almost each of them has 150K USD sitting in cash in their banks, but they are hesitant to invest that in real-estate because of their temporary work-permit status and their enduring green card applications which is taking at least 9 years to come through because of congress mandated per-country quota system. Imagine if you let them get green cards. You'll wipe out 4.3 million (your statistical number) homes in just a flash. I myself am sitting on 250K hard liquid cash plus stocks and bonds. But I can't buy a house because my green card is expected to come by 2016 (as per INS). So I can't invest in anything here. just imagine the pruchasing power of 4.3 million people plus their spouses.

Glmory

October 6, 2009 10:03 PM

Since 2000 incomes have stagnated, and unemployment has doubled. Yet according to the Case-Shiller index house prices are 41% higher than they were then. How exactly will these now poorer Americans afford these still inflated prices?

The worst of the decline is over, but until we see a return to 2000 levels don't expect stable home prices.

Daniel Levitan

October 6, 2009 10:14 PM

Sorry to disagree but with 7,000,000 potential additional residential foreclosures waiting in the wings (the shadow inventory), and the commercial sector's problems yet to surface, an extension of the tax credit is an essential part of keeping the recovery going.

Rahul

October 6, 2009 10:22 PM

@JZ..You are not stating facts.
Between 2000 and 2008 number of total H1B's approved. Less than 50% goes to Indians and less than 30% stay back in the US.

2000 136,787
2001 201,079
2002 103,584
2003 105,314
2004 130,495
2005 116,927
2006 85,000
2007 85,000
2008 85,000
2009 65,000
So what's the total? 1.1 million not 4 million out of which max of 500,000 could be from India this decade.

Under the current law, the number of visas is:

* 85,000 (20,000 of which are reserved for graduates with advanced academic degrees studying in US colleges).
* Unlimited to non-profit and government research laboratories and to universities.

Rahul

October 6, 2009 10:23 PM

software program

October 7, 2009 12:03 AM

everyone should just just quit their jobs and focus on what they really enjoy doing.. and still stay in their houses. even though the so called banks say it foreclosed. they can't kick us all out. we should have done this a long time. we shouldn't have to keep paying for the banks messing up or any so called "government" corporation. it's not fair and never was. we shouldn't have to keep fighting for "jobs" on a fake "job market" that doesn't really serve anyone. these corporate con men use jumbled words to keep us slow and stupid while we slave all day to do what we were told in their school day care centers. we're taxed over and over again but if we ask for anything back we are made to think it's a handout. total b.s. stay in your house. tell the banks to f off. the real economy is based on real people and quality of life for all, not fake money made up by terrorists.

paris

October 7, 2009 1:32 AM

The home prices will roll back to 1996 levels, if not 1992. Rents will stay roughly the same, this will encourage more speculation on distressed properties. Here in FL you can already buy a very decent place for 40K. Not in South beach, but in many other places.Housing will become cheaper before it gets more expensive again, but it will never go back to 2006 levels; as US economy slowly dies and middle class along with it...we will see many unusual for US economic artifacts.

Mehmet Cihan

October 7, 2009 3:46 AM

If the US engineers were really better than Indian guys, why they cannot beat Indian guys on tests, creativity, IQ, and all other engineering related stories? This is a market system which places emphasis on supply-demand curves which in turn implies better ones survive others must die.
That's it.

PossumLover

October 7, 2009 8:22 AM

The $8000 tax credit artificially boosts housing prices and should be ended. For a sustainable recovery, housing prices must be based on affordability, not on some insane benchmark reached at the top of a bubble. Salaries do not justify the current prices. I live in the NE and I expect prices to drops another 25% to reach 2003 levels.

wowlfie

October 7, 2009 9:43 AM

America is in big trouble the next 2 to 3 years if congress doesn't INCREASE the subsidization of housing much as it did after the Great Depression to spure home ownership and create stable communities. Right now America is in danger of becoming one big 'Pottersvilles' with few homeowners after the baby boomers parents die off and estate liquidated. What will occur is that home values will plummet because it pays to RENT and not to buy with our mobile society. And it will continue to pay to RENT instead of owning a home because it costs too much to sell a home and takes to long to sell a home and thereby OWNERS are locked into their jobs or if they loose their job they won't be able to transfer to a new location. This is the bubble problem coming up that so called experts can't see the forest for the trees. Mark my word that tens of millions of Americans are going to loose their homes in the next decade if our government can't see what's really happening and that stable communities, already falling apart with dozens of foreclosured homes that are falling apart and be over run by hoodlums extracting every bit of valuable copper, appliances, cabinets, etc from these homes and the blight they cause on communities cannot be over stated. It will make the suburbs look like the old run down cities that no one wants to live in and prices plummet far more than they already have. The only way to avoid this is a new Great Depression policy of subsidization by increasing the interest rate deduction allowed and more credits for home buyers. IF the SO called expert republicans get their way this country is doomed to go bankrupt in less than 5 years.

Hugo van Randwyck

October 7, 2009 11:31 AM

Washington politicians have found another way to distort the price of housing/renting - and so benefiting bankers and real estate people. If house prices and rents fell to a realistic level, say 2.5 or 3 times one person's average income, then even those people who have foreclosed will be able to get back into spending money and getting the economy going again, since they would have a lot lower rents and higher disposable income. Copying the Japan policies of the '90s, is not the best option. Time to reward good habits and the well run banks.

GOOD GRIEF!

October 7, 2009 11:48 AM

BW can't be serious? The 'stuff' is REALLY going to hit the fan next year, as tens of thousands who have been living in the banks' homes RENT/MORTGAGE FREE for 1-2 years, will be out on their butts. Like the old Carpenters' song...'We've only just begun....'

tsunami believer

October 7, 2009 4:25 PM

The foreclosure tsunami cannot be held off forever. It will wash over everything despite what the realtors would like people to believe.

Gullah

October 8, 2009 12:00 PM

Despite the immense wishing here to the contrary, there is no evidence the banks and govt will unleash the shadow inventory in tsunami like fashion.

Fact of the matter is, they CAN play kick the can forever - or at least another 5-10-20 years, so long as it takes to drible out the shadow inventory little by little so as not to swamp things.

Fact of the matter is "extend and pretend" is a game the US has been successfully playing for at least 70 years now. Go back to the senate floor transcripts on the govt response to the great depression, and there are people screaming "we cant do this forever"!!!

They are right, we cant do this forever, but we can do it for decades or more, and there is no evidence this game of extend and pretend will be given up during our lifetimes.

Shayla Sharp

October 8, 2009 8:21 PM

I don't believe the $8000 tax credit boosted housing prices at all. But it did stimulate sales and that is a good thing. But it's not enough. The number of people losing their homes to foreclosures is embarrassing and shameful. Predatory lending practices screwed so many, but we can't go back now. What I am seeing in my area are sellers that purchased when the market was high (2006, 2007) and they are now trying to get out from under their mortgage. They are stubborn sellers - they do not want to lower their list price, thus, their house does not sell. Trying to re-coop on an inflated price is not a game they are going to win. I am in favor of the market turning around and housing prices more realistic.

stop the bailout

October 9, 2009 1:11 PM

IMHO, the housing recovery is not real. It is still a continuation of the bubble era. The fact of the matter is the unemployement is high and home price is way beyond people's affordability. The bubble will continue as long as banks keep getting bailout.

mike

October 22, 2009 11:36 PM

Oh yeah like any of you who have something to say Forseen the resession coming now you want to fix it. hahaha I worked in CA. as a heavy equip. operator. do you how many house pads we did before 2006? over 10,000!!! no houses on them.... one company...greedy california!!! How many grading companies are in california?? Go figure. that is why in 2003 I chose not to buy a house. foreclosures HA!! unfinished job sites. did i menton i bought a house last month in the State of Washington.

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About

BusinessWeek editors Chris Palmeri, Prashant Gopal and Peter Coy chronicle the highs and lows of the housing and mortgage markets on their Hot Property blog. In print and online, the Hot Property team first wrote about the potential downside of lenders pushing riskier, "option ARM" mortgages and the rise in mortgage fraud back in 2005—well ahead of many other media outlets. In 2008, Hot Property bloggers finished #1 in a ranking of the world's top 100 "most powerful property people" by the British real estate website Global edge. Hot Property was named among the 25 most influential real estate blogs of 2007 by Inman News.

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