Housing: Still a Long Road to Recovery By Ben Steverman Business Week 08-23-09

Housing: Still a Long Road to Recovery
The housing market may be busier, but that doesn't mean home values are set to rebound any time soon
By Ben Steverman
Business Week
August 23, 2009

If you're selling your home, the good news is that you're likelier to find a buyer now than in the last couple of years.

The bad news is you should be prepared to slash your asking price.

This summer, recent data show, real estate agents are busy and, spurred by low interest rates, falling home prices, a wide selection, and government incentives for first-time home buyers, home shoppers are becoming home buyers.

"What we're seeing is a turn in the housing market," says Gary Wolfer, chief economist with Univest Wealth Management (UVSP).

What we're not seeing, however, is rising home prices. And that's disturbing to the many Americans who have a large share of their wealth tied up in real estate.

Supply of Homes Rising Alongside Sales
Even as existing-home sales rose 7.2% in July, the total supply of existing homes on the market rose 7.3%, to more than 4 million. According to National Association of Realtors data, released Aug. 21, if home sales continue at this pace, it would take 9.4 months to sell off the supply.

The rise in supply is more than quenching the rising demand. The median existing-home price in July was $178,400, 15.1% below a year ago.

A better gauge of home prices arrives on Aug. 28, when the June S&P/Case-Shiller Home Price index is scheduled to be released. The May index, released a month ago, showed prices were down 17.1% from a year ago, but up 0.5% from April. Action Economics expects June's index to dip slightly lower again.

Even if prices improve modestly, it may be difficult to stop the slide of home prices entirely for several more months, economists say.

"Clearly the downward pressure on home prices should ease as we go forward," says First American Funds chief economist Keith Hembre. "But there is still going to be downward pressure."

One problem is foreclosures and other forced sales of homes. The National Association of Realtors estimates 31% of sales were "distressed transactions" in July.

These sales add supply to an already crowded housing market, but also have a broader impact. Just a couple of foreclosure sales can hurt prices across an entire neighborhood, notes OppenheimerFunds (OPY) economist Brian Levitt.

Weak Job Market Threatens Recovery
Other trends are working against the housing market. Last month, U.S. nonfarm payrolls fell another 247,000, less than expected, and the unemployment rate fell from 9.5% to 9.4%. Job losses may be slowing, but layoffs haven't stopped. For the week ended Aug. 15, initial jobless claims rose by 15,000 to 576,000.

These labor market statistics affect both supply and demand in the housing market.

The unemployed are at risk of losing their homes. "Today's jobless claim could be tomorrow's delinquency or foreclosure," Levitt says.

Homes are more affordable now, and that has brought more buyers to the market. But further improvements in affordability are dependent on prices continuing to fall, mortgage rates staying low and, especially, buyers having the income to support a major home purchase.

The brutal labor market is putting pressure on wages—pressure that could persist for years, Hembre says. "You still have a pretty substantial headwind of weak employment conditions and weak income conditions," Hembre says.

Several economists said they expect the supply of homes to finally match demand sometime in 2010. That would stop the slide of prices, but it doesn't guarantee a rebound.

"Even after we hit the low, we'll be bouncing along that low for an extended period of time," says David Rosenberg, chief economist at wealth management firm Gluskin Sheff. "The bottoming-out process is [measured] in years, not quarters."

Low End Closest to Hitting Bottom
Rosenberg believes many home buyers this summer are investors who are turning units into rental properties. As a result, rents are falling along with home prices, giving home shoppers less incentive to move from a rental unit to their own home.

According to Hembre and Rosenberg, the lower end of the housing market—plagued for years by subprime and other foreclosures—is closest to seeing prices hit bottom. But higher-end homes could have further to fall.

Like lower-income subprime buyers, many middle-class and upper-income homeowners also bought more home than they could afford, Rosenberg says. At the same time, demographics will hurt many baby boomers who would like to downsize to smaller homes as they age. "They're going to be selling into a shrinking pool of trade-up buyers," he says.

Despite the gloomy outlook for home prices, the most recent news is good. The housing market does show signs of stabilizing. The problem is that housing markets move much more slowly than stock markets, which often bounce back quickly after a sudden steep decline. While stock market players needed to wait several months for a rebound in equity prices, homeowners may be waiting several years for an improvement in the value of what is typically their biggest investment.