Reaching a floor in housing

July 27, 2009

– Christopher Swann is a Reuters columnist. The views expressed are his own —

By Christopher Swann

NEW YORK, July 27 (Reuters) – Nestled in today’s otherwise heady home sales figures was a sobering message on prices. Homes were still fetching close to six percent less in June than they did just a month before, and 12 percent less than a year ago.

After three years of falling prices, homeowners are wondering when this will come to an end. “Don’t hold your breath” is the message from government forecasts. The “more adverse” forecast in the bank stress tests would have prices almost halving by end-2010 from their 2006 peak.

Yale economist Robert Shiller has even raised the more depressing example of Japan, where land prices in its major cities fell every single year for 15 years following the bursting of their bubble in 1991.

So will Americans have to wait until the Jonas Brothers develop laughter lines to see a revival in housing?

Despite the slump in prices, there are signs of hope. Indeed, the prospect of a repeat of Japan’s long-term decline in prices is extremely remote.

Economists are often tempted to treat housing too much like equities, undervaluing its role as a basic subsistence need. A look at the fundamentals of the housing market — population growth and construction costs — is at least modestly reassuring.

One source of comfort is demographic. Population growth has generally had a slippery relationship to house prices. A rising headcount does not automatically translate into extra demand for housing.

The rate of household formation — Census Bureau-speak for the number of people who need new accommodation — can fluctuate with the economic cycle. In depressed times, new graduates can move back in with their parents, couples can postpone a much desired divorce and immigration slows. The Census Bureau estimates that net levels of household formation — which normally fluctuates around 1.4 million a year — more than halved last year.

But this should soon rebound to more normal levels. In a recent paper MIT economics professor William Wheaton suggested that household creation should revive to at least 1 million a year by 2010. This is a far cry from Japan in the 1990s, when the number of households actually started to slide.

Assuming around 200,000 demolitions a year, Wheaton says, we will need about 1.25 million new units annually in coming years. With U.S. home-building at less than half this level, there is a giant shortfall.

“At this rate, the current excess inventory of units for sale or rent will be back below normal levels in 2011,” he argues. There are already signs that the market overhang is shrinking. At the existing rate of sales it would take 8.8 months to clear the unsold stock of homes, the lowest level since October 2007.

Another reason we may be near a bottom in housing is construction costs. If prices slump below construction costs, builders soon lay down their tools. Eventually shortages drive up prices again to the point where the builders’ strike ends.

Here again the United States is in a different position from Japan. At the height of Japan’s boom, the price of land accounted for as much as 80 percent of the cost of real estate. Even after more than a decade of falling prices it may still be 40 percent — creating scope for further declines.

This is not true in most areas of America. Harvard economist Edward Glaeser believes that in many areas, prices have already fallen close to the cost of construction in places like Phoenix and Atlanta. As inventories clear, this should help set a floor under prices.

Outside a handful of coastal cities, housing has never been the great investment that many Americans assume. Now it may be over a decade before house prices return to their 2006 level. But at least American homeowners are likely to escape the depressing fate of their Japanese counterparts. An end to house price falls is at least now faintly visible on the horizon.

For previous columns, Reuters customers can click on [SWANN/]
(Editing by Martin Langfield)

((E-mail Keywords: COLUMN HOUSING/

One comment

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see

Hi Christopher Swann. After reading your article. I still have to wonder, has anyone paid attention to where the under line cause of this disaster is? Not sure if you follow the FBI press report. However, it’s a great source for finding out how our economy fell so far from grace. I’ll quote a statement from the FBI’s Assistant Director for the Criminal Division who testified in 2004 before the House Financial Services Sub-Committee it has some relevence to the issues at hand, becuase had we paid attention to these reports we would not be in this situation: “If fraudulent practices become systemic within the mortgage industry and mortgage fraud is allowed to become unrestrained, it will ultimately place financial institutions at risk and have adverse effects on the stock market”. Doesn’t he sound like he was on to something back then? He also noted that the FBI supported new approaches to address mortgage fraud and its effects on the U.S. financial system, to include: 1) “a mechanism to require the mortgage industry to report fraudulent activity.” You mean there’s mortgage fraud in our financial system? He also asked a question; “But what is mortgage fraud? Although there is no specific statute that defines mortgage fraud, each mortgage fraud scheme contains some type of material misstatement, Misrepresentation or omission relied upon by an Underwriter or Lender to fund, purchase or insure a loan. Many of the Fraud for Profit schemes rely on “industry insiders, who override lender controls”. The FBI defines industry insiders as appraisers, accountants, attorneys, real estate brokers, Mortgage Underwriters and processors, settlement/title company employees, Mortgage Brokers, Loan Originators, and other mortgage professionals engaged in the mortgage
industry. Are we being told that our mortgage professionals are involved in fraudulent activity? You see Christopher, the issue not how long will it take our economy to recover? Nor is it the suffering of us as individuals and families? The issue is and has been from day one, Brokers and Lenders solicited and deceived under-qualified home owner’s into participating in a purported “worry free” and hands-off bank fraud system of falsifying income/asset information on a mortgage loan application involving the refinancing of their home. This makes it appear that the under-qualified homeowner could afford the mortgage and guaranty- teeing the loan, commissions and yield spread for the mortgage professionals. Once the proceeds from the refinance were depleted (due to home improvements, lavish lifestyles or supplementing their income to make the mortgage), the under-qualified home owner’s defaulted, thereby forcing the Lenders to foreclose. At this point Lender’s are reluctant to modify due to the fact that the under-qualified home owner’s didn’t qualify in the beginning. And there’s no commissions and yield spread for the mortgage professionals. So why would the Lenders go through that again, for free? Ultimately, these fraudulent schemes caused incalculable harm to many investors and the home owner’s. Like the FBI’s Assistant Director for the Criminal Division stated: If these fraudulent practices would not have been allowed to become systemic and unrestrained within the mortgage industry, it would not had ultimately place financial institutions at risk and nor would it have had such an adverse effect on the stock market. So hear in lies the core cause of our dilemma. We have to make the mortgage professional re-write those bogus loans that the under-qualified home owner’s could not afford. And use the true income and assets of the home owner’s so that the new mortgage would be one they can afford. This also puts spending power back into the home owner’s control. Because now they have money to spend! Spending money creates a need for jobs! Jobs produce taxes! Taxes keep our state and city workers employed! You get the picture. And last but not least, it gives you Christopher a chance to write about how to put things back in motion!!! The mortgage professionals have tricked us again. They say they don’t really know how this all happened? It happened so fast! Til it was too late. We have to be smarter than the thives! Good Luck Christopher.

Posted by Darryl Hutchinson | Report as abusive