Get Ready For The Housing Market Recovery!

The Forecast: A Better Second Half

By Lawrence Yun, NAR Chief Economist

Rewind back to 1998. That's 10 years ago when you were younger and more energetic. You never imagined that you today would be so different from the person that you projected yourself to be a decade ago. Plans get squashed, chance-events appeared, and gut decisions interestingly turned out to be right. That's the unpredictable journey of life.

From 1998 to today, 25 million more people are living in America. Employment grew by 11 million. The typical family income grew from $47,000 to nearly $60,000. The stock market roller coaster ride can be quite scary, but the Dow Jones Index moved up from 9,000 (an all-time high at that time) to today's 12,500 or so. Interest rates are much lower today. Home prices are higher, but the housing affordability index - which takes into account people's ability to buy a median-priced home at prevailing mortgage rates - is quite comparable between the periods. The index was 137 in February 1998 compared to 135 in February 2008.

More people, more jobs, more income, more stock market wealth, nearly the same affordability conditions … yet current home sales activity matches the level of 1998. No one was shouting about excessive home sales activity back then. However, some today are predicting even lower sales.

The current 10-year low home sales activity can partly be justified by the virtual non-existence of subprime loans, which accounted for about 20 percent of mortgage originations in recent years. But subprime loans were essentially non-existent 10 years ago also. Conforming and government backed FHA and VA loans have tighter underwriting standards - but those standards were also pretty much in place 10 years ago. What is limiting housing demand, therefore, cannot be explained by fundamentals. The soft housing demand is psychological. It is a crisis of confidence.

Buyer confidence can be fixed quickly with a financial inducement: a tax credit for homebuyers. D.C. homebuyers enjoy it; why not apply it for the whole country? Given that the housing slowdown is pushing the economy to the brink of recession, why not resuscitate the sector that is being held back by not by fundamentals but by pessimism.

Though February closed sales rose ever so modestly, the latest slippage in the pending home sales index to 84.6 from 86.2 in the prior month points to continued soft sales activity through early spring and possibly through early summer. Granted, an era of successive deep sales declines appears to be over, but the 10-year low sales activity is unjustifiable.

Fannie and Freddie have not yet participated in what was previously the jumbo loan market. Though legally permissible now, they have not yet entered the market due to the need to reprogram software and rewrite paper documents. They have indicated mid-April as the likely starting point for jumbo loans to be picked up in bulk from lenders, which would then replenish lenders' capital so as to permit more loan originations at favorable interest rates. Once that happens, expect a lift in median home prices which have been artificially depressed to date due to very few jumbo loans and very few expensive home sales.

With an anticipated pickup in home sales (or a guaranteed pickup in home sales with the homebuyer tax credit) in the second half of the year, the economy will also begin to grow. The combination of fiscal stimuli and the usual lagged impact of monetary policy will further help jump start the economy in the second half.

U.S. exports have been on a tear and that will help keep the economy from formally slipping into a recession in the first half despite the soft housing sector. January's exports soared to $148 billion, up 16.6 percent from a year ago: nearly a doubling of exports at the turn of the century. Without exports, the U.S. economy would be contracting at 1 to 2 percent rate. Unemployment is rising, but the formal output contraction will be avoided.

Another factor that will help the economy avoid recession is slim business inventory conditions. Housing inventories are high, but business inventories are low. The current wholesale inventory-to-sales ratio of 1.09 is at an all-time low while retail inventory-to-sales ratio of 1.48 is only a tad higher from all-time low mark of 1.45. Going into the last recession in 2001, the inventory-to-sales ratios had been 1.29 for wholesale trade and 1.59 for retail trade. Low business inventory conditions mean companies do not to sharply cut back production from worries over inventory overhang.

The bottom line on the economy is for zero growth in the first half, but 2 percent economic expansion in the second half. The unemployment rate will reach 5.7 percent by the election time because of the lagged impact of zero economic growth in the first half. Rising unemployment mitigates inflationary pressures and consumer price index will decelerate significantly by the year end.

Rising home sales and rising home prices at the end of the year will mark one heck of a recovery after so many unprecedented disruptions. The foreclosure starts will begin to drift lower by then. The Fed, Congress, and the White House all need to be commended in getting America rolling again.

This article is from NAR's website @ http://www.realtor.org/ and can be found there along with other articles and commentaries about thr real estate industry and market.