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Housing recovery could take a decade, economists warn

By Renae Merle
Washington Post Staff Writer
Wednesday, January 27, 2010; A12

Even as the housing market shows signs of improvement, including in new data released Tuesday, economists warn that it could take up to a decade for many homeowners to regain equity in their homes, while some people in the hardest-hit regions of the country may not see a recovery during their lifetime.

Home prices have fallen 30 percent since reaching their peak in 2006, and many economists think they will take another tumble this year as more foreclosures pile on the market. The pace of recovery will vary throughout the country, with homes in the most battered markets taking the longest to regain value. Meanwhile, millions of homeowners who are "underwater" -- owing more on their mortgages than their homes are worth -- face years of negative equity that puts them at a higher risk of foreclosure.

"What are we going to do down the road when people who should have been saving for retirement, or college funds, are spending that money instead staying current on their underwater home?" said Brent T. White, a University of Arizona law school professor who has studied underwater borrowers.

Economists worry that the housing market could stumble later this year when government measures to boost sales, including ultra-low interest rates and a tax credit for home buyers, expire.

"We're just not convinced that the housing market can stand on its own two feet without the fiscal support of the tax credit," said Paul Dales, an economist for Capital Economics, a research firm.

Signs of strength

There are some signs that the housing market is strengthening. Homes sales last year increased 5 percent from 2008 and the backlog of unsold homes on the market fell significantly. The Standard & Poor's/Case-Shiller home-price index released Tuesday showed that in 20 major cities home prices rose 0.2 percent on a seasonally adjusted basis between October and November, the sixth straight month-over-month increase.

But that same report illustrated the precarious nature of the recovery. In some metropolitan areas, including New York and Chicago, prices fell in November compared with the previous month, according to the index. In the Washington region, prices fell slightly, 0.2 percent on a seasonally adjusted basis. And prices overall in the 20-city index were down 5.3 percent compared with the corresponding period in 2008.

There "is no clear sign of a sustained, broad-based recovery," said David Blitzer, chairman of S&P's index committee.

In fact, many economists are expecting more losses. Moody's Economy.com has forecast an additional 10 percent decline in home prices this year, while Barclays expects prices to fall 8 percent by early 2011. Wells Fargo is more optimistic -- it expects home values to drop just 3 percent more this year.

Even after the housing market stabilizes, it will take years for some owners to see the value of their homes appreciate. About 25 percent of homeowners owe more than their home is worth, according to data from First American CoreLogic, a research firm.

While it has historically taken five to 10 years for home prices to regain losses after a major downturn, analysts said, it is likely to take much longer this time, particularly in parts of the country that have seen the steepest declines.

"In California, Florida, in the ground-zero zones, it could take 15 years to fully recover," said Lawrence Yun, chief economist for the National Association of Realtors.

In regions marked by rampant speculative home purchases, such as Naples, Fla.; Las Vegas; and parts of Southern California, it could take even longer, said Mark Zandi, chief economist for Moody's Economy.com. "It's not that we will never get back there. But it will take generations because it will take that long to grow the income and wealth to support those types of housing values," he said.

Historical comparisons are likely moot, given the unprecedented nature of this housing downturn, said Thomas Lawler, a housing consultant and economist. Most housing-market collapses have been regional, not national like this one, he said, and many have not included the steep price declines experienced this time around.

"If the question is how long will it take for prices to recover to the peak, it will be longer than before simply because prices fell by more," Lawler said. And in some parts of the country, the answer may be never, he said.

Speculative buying

Speculative buying pushed development farther from urban centers during the housing bubble, Lawler said. In some cases, local markets faltered before amenities such as grocery stores could be completed, and now there is no reason to finish those projects, he said. "There are going to be parts of Florida where homes shouldn't have been built [and] . . . that should have stayed farm land," he said.

To achieve a healthy recovery, the housing market would need to avoid the quick run-up in prices experienced during the housing boom, economists said. If home prices rise significantly faster than inflation, it could lead to another housing bubble, they said.

During a normal market, home prices rise 3 to 5 percent a year, Yun said. But during the housing boom, the appreciation rate was twice that in many areas. In the Washington region, home prices rose by 10 percent or more a year between 2001 and 2005, he said. "In the Washington market, which was one of the more bullish markets, it's going to take many years for people who bought at the peak to see those" prices again, Yun said.

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