WASHINGTON—The falling US housing market, which triggered the global financial crisis, is still far from reaching the bottom, threatening more pain for consumers and more bad debt for banks, according to analysts.
With the bursting of the real estate bubble, prices are sinking under pressure from a glut of unsold homes, particularly in areas like California, Florida and Arizona. Exerting further downward pressure on home prices are rising foreclosures, worsening unemployment and tightening credit conditions.
“In terms of prices, I don’t think they’ll bottom out until the end of next year and I don’t think they’re going to bounce back. They’ll crawl back,” said David Wyss, chief economist for ratings agency Standard & Poor’s.
Wyss forecast another 10-percent fall in home values over the next year—as measured by the Standard & Poor’s/Case-Shiller property survey that tracks prices in 20 cities. The market has fallen 20 percent since its peak in July 2006.
Skidding prices will not be reversed by proposed government intervention to help homeowners threatened by foreclosure, according to analysts. As economic conditions worsen, the property market looks a one-way bet in the short-term.
‘Ugly little spiral’
“We’re in an ugly little spiral at the moment,” said Keith Gumbinger, vice president of HSH Associates, a research company that tracks the mortgage market by surveying 2,000 lenders weekly in the United States.
“The market is suffering from oversupply and there has been very little improvement in factors that would contribute to demand,” Gumbinger explained.
“We could be talking another year before we see a stabilization and that all hinges on whether the economy deteriorates to a great degree.”
In the booming decade preceding 2006, home building rocketed as developers cashed in on easy credit and strong economic conditions. Demand was stimulated by mortgage companies giving easy loans with few conditions.
Now, thousands of new homes stand empty, joblessness is rising, mortgage rates are higher and people are defaulting on their payments, triggering fire sales of foreclosed homes at knock-down prices.
More vulnerable than ever
After a month of financial chaos has pushed the global monetary system to the brink of meltdown, the broader economy now looks more vulnerable than ever, raising the prospects of a deep recession that would further reduce incomes and housing demand.
“The house price figures that we have are prior to the events last month on the stock market,” said Todd Sinai, an associate professor of real estate at the Wharton School at the University of Pennsylvania.
“We don’t know yet the impact of the economic turmoil on the housing market and I suspect it will not be positive.”
Despite a US government rescue of mortgage giants Freddie Mac and Fannie Mae and a $700-billion program to rescue banks, mortgage rates are still rising and will remain high relative to the levels of previous years, analysts say.
Biggest one-week jump
Bankrate.com, which tracks the home loan market, says the rate of an average 30-year mortgage rose by 0.5 percentage points to 6.74 percent last week, its biggest one-week jump since 1987.
Gumbinger, who estimated the rate at 6.75 percent, said this compared with a low of 5.61 percent in January and should be viewed in a context of tightened conditions where lenders are turning away people with poor credit ratings or small down payments.
“There are borrowers who grew up in a time when credit was available in any circumstances and that is no longer the case,” he said.
One mitigating factor for prices is that property companies are reacting fast to reduce the supply of homes. This will eventually support prices when it filters through, but this is unfortunately bad news for the broader economy in the short run.
Additional 6.3-percent fall
Construction starts on new US homes slumped an additional 6.3 percent in September to the lowest level since the recession in 1991, official data showed on Friday.
Year over year, housing starts were 31 percent below the level of construction in September 2007.
“Although the builders have cut back pretty sharply on new homes, most of the problem is existing home inventory,” Wyss said.
“The problem is that the market is going to have to overcorrect to get rid of the oversupply that’s out there.”
Existing home inventories are high because of the glut of newly finished unsold homes sitting on the market, the difficulty of selling older homes in a market with few buyers and an increase in foreclosed property.
Jed Smith, a researcher from industry group the National Association of Realtors, also sees a glimmer of hope in 2009, forecasting a modest 2.0-percent increase in prices nationally over next year.
“The increase is likely to come toward the latter part of 2009,” Smith said.
