Only modest improvement in housing market foreseen

The housing market is wracked with pain, and economists' prognoses for the rest of this year, maybe for a good part of 2010, call for only modest improvement:

Prices will continue to fall; the surplus of existing and newly built homes will shrink slowly; construction will remain at low levels; credit will stay tight.

Ailing economies eventually recover, however, sometimes with a stumble or two (an OK month here, a not-as-bad-as-we-thought quarter there).

"When a man is starving, a few crumbs can seem like a buffet," said Kevin Gillen, vice president of Econsult of Philadelphia and a Wharton School research fellow. "Only when inventories are restored to their long-run average will we return to a more balanced market."

If there is consensus among economists both inside and outside the housing industry, it is that today's problems will not be fixed anytime soon.

The corollary: It will take until 2020-21 for home prices to reach the levels seen in 2006, before the real estate bubble deflated.

After prices drop an additional 10 percent nationally in the next nine to 12 months, Moody's Economy.com chief economist Mark Zandi suggested, they will resume normal annual gains of just one to two percentage points above the rate of inflation.

As for housing starts, the historic trend is 1.6 million to 1.7 million units annually. Zandi predicted the numbers would not reach that level again until 2015.

"Home building will come back, and the builders who hang on will do very well when it does," said economist Patrick Newport, of IHS Global Insight Inc. "It's just that they have to work out the 800,000 excess units for sale today."

Houses will become much smaller than the current 2,521-square-foot national average, Newport predicted: "The McMansion will be dead."

With 18 months' worth of inventory for sale and 2.1 million units vacant nationally, residential construction is now at a standstill. For some builders, the future is very much in doubt - witness the Chapter 11 bankruptcy filing by Harleysville home builder T.H. Properties L.P. on Thursday.

When will normalcy return? It could be a long time.

And when it does, IHS Global Insight's Newport and Marshal Granor, principal in Granor Price Homes, of Horsham, a veteran builder who has weathered similar economic storms, see a changed landscape.

"Real estate is a local phenomenon," Granor said. "Towns have the better streets people desire, so while it may be easy for a megabuilder to sit at a map displaying incomes, draw concentric circles, and buy land blindly, it still requires working closely with local zoning and planning and contractors and suppliers to be successful."

As the economy begins to rebound, so will energy prices, Newport said. And when gasoline heads back above $4 a gallon, home buyers will shift back to urban population centers, which will have become more affordable thanks to price declines of almost 25 percent nationwide thus far.

More affordable for people with jobs, that is. Zandi predicted the unemployment rate will rise, but more slowly than recently, to 10.5 percent before the trend reverses within the next year or so.

After every previous recession, home sales have picked up first, and increased affordability was the reason each time, said PMI Group Inc. chief economist David Berson.

"Obviously, until job growth resumes, there will be no strong recovery," he said.

More people will rent, at least in the short term, said Jeffrey Algatt, senior associate in Marcus & Millichap's Philadelphia office, "because of personal-liquidity shortages and tighter lending."

"Long-term, however, the government tax policy is still encouraging homeownership, and there will be strong appreciation over today's home prices that will draw people back in," Algatt said.

Still, it is unlikely that the government will push hard to get homeownership numbers back to the 70 percent they reached at the peak of the real estate boom. After two years of downturn, the rate is down to 67 percent, as foreclosures have created a surge in renters.

"As the population ages, homeownership grows, but this will happen much less quickly," Berson said. "What happened when you put millions of people into houses they weren't ready or able to buy will result in efforts to create sustainable homeownership."

Numbers, in thousands

Year Starts

1991 840

1992 1,030

1993 1,126

1994 1,198

1995 1,076

1996 1,161

1997 1,134

1998 1,271

1999 1,303

2000 1,231

2001 1,273

2002 1,359

2003 1,499

2004 1,611

2005 1,716

2006 1,465

2007 1,046

2008 622

SOURCE: U.S. Census Bureau

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