The darkest hour
Signs of hope among the gloom
May 19th 2011
WASHINGTON, DC
from the print edition
AT THE ripe old age of five years, America’s housing bust is still very much alive and kicking. House prices dropped 3.3% in the year to February according to the S&P/Case-Shiller index, the fastest decline since November 2009. The Federal Reserve’s preferred measure, the CoreLogic house-price index, showed an even worse one-year decline of 7.5% in March. And Zillow, an online real-estate database, recently said that prices fell 8.2% in the year to March. Zillow has reported falling prices for 57 consecutive months.
The latest housing hiccup has Americans worried that a new phase of the crash is under way. Two years ago, housing appeared to hit bottom. Prices and sales levelled off thanks to low interest rates and a generous housing tax credit. But that respite ended last summer. The tax credit expired just as a broader economic chill descended, and price declines resumed. Some forecasters expect another 5% to 10% fall in prices before the market rights itself. Robert Shiller, of Case-Shiller index and irrational exuberance fame, reckons a further 25% decline is not out of the question.
That would mean big trouble for the economy. Reductions in construction jobs limit growth, further depressing housing markets. As prices fall, existing mortgages look less affordable and defaults rise. Banks and the two government-sponsored mortgage giants, Fannie Mae and Freddie Mac, are already labouring under the strain of huge portfolios of foreclosed homes. Bulk selling by Fannie and Freddie helps explain the faster decline in prices this year. With default rates still high, banks are demanding better credit ratings and larger down-payments than many first-time buyers can manage.
But there are signs this may be the darkest hour just before the dawn. House-ownership is beginning to look more affordable by many measures. Adjusted for inflation, prices are close to their long-term trend after the bubble years of the 1990s and the first years of the 2000s. And the ratio of house prices to rents has returned to its pre-bubble level (see chart).
Other numbers are looking a lot better. Vacancies for apartments tumbled in the first quarter of the year and are now at a three-year low. Rents have been rising, and analysts expect them to increase by over 4% this year and next. Rent rises typically support house prices by making home-ownership more attractive.
The credit markets are healing. Mortgage borrowing actually rose in the first quarter, according to the Federal Reserve Bank of New York. New foreclosures were 17.7% lower in the first quarter than they had been at the end of 2010, and household delinquency improved for a fifth consecutive quarter. Mortgage rates have fallen back to historic lows, tracking declines in yields on American government bonds.
Explore and compare global housing data over time with our interactive house-price tool
Perhaps the best news for housing has come from the labour market. The economy added over 200,000 jobs in each of the past three months and over 1.3m jobs in the past year. A better job market enables struggling households to make mortgage payments, reducing foreclosures. For most of the bust, borrowers that fell behind on their loans were likely to end up in serious difficulties. In the first quarter of this year, for the first time since 2007, more mortgage borrowers caught up with their payments than fell further behind.
Job growth may also set loose what economists call “shadow demand”. Some households, especially young workers, shared homes during the recovery to economise but can now afford to move out. Above all, the construction business has been so depressed that even a minor spurt in demand from new households could give prices a lift. If that, in turn, boosts construction employment, a vicious housing cycle could turn virtuous.
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