The State of the Nation’s Housing Market

Today, Harvard’s Joint Center for Housing Studies released its 2010 report on the state of the American housing market. The verdict? Not good, if stable. The bottom line:

The nation has not faced housing problems of this magnitude since the Great Depression. Heavy job losses and lingering high unemployment rates have increased housing insecurity for millions of families. The share of U.S. households with severe housing cost burdens reached a record high in 2008 and may have climbed again in 2009. Although households have switched from net spenders to savers, their balance sheets have still not recovered for the boom years.

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It will likely take years for the fallout from the Great Recession to abate. The 2000s ended on a sour note, with real household incomes lower than where they had started the decade and the shares of housing cost-burdened households at record highs. With federal budget deficits looming, the resources necessary to make a noticeable dent in the nation’s widespread housing affordability problems are unlikely to appear anytime soon. The share of cost-burdened homeowners may, however, ease as some stressed households default on their loans and become renters, or as others qualify for federal loan modification programs. Tighter underwriting standards and lower home prices will also keep more homebuyers from taking on excessive cost burdens right from the start.

And the biggest threat to the nascent housing recovery, or at least the bottoming-out and stabilization? Joblessness. The 15 million unemployed Americans are not purchasing homes — and many are desperately trying to sell.

After following a classic pattern of improving exactly two quarters before growth in real gross domestic product (GDP) turns up — and within two to three quarters of renewed employment growth — new home sales sputtered in the final quarter of 2009 and the first quarter of 2010.

Despite strong new home sales gains in March and April 2010, the durability of the housing recovery is still at risk. In addition to the expiration of the homebuyer tax credit program, which may have temporarily jacked up home sales, the market faces threats from the severe overhang of vacant units, still high unemployment, and record numbers of owners with homes worth less than the amount owed on their mortgages.

Demand has been so weak that vacancies hit record levels despite draconian production cuts. The number of vacancies exploded from 2006 through 2008 before growth slowed in 2009. For-sale vacancies finally eased last year, perhaps aided by the first-time homebuyer tax credit. But increases in for-rent vacancies more than offset the reduction, suggesting that some owners may have shifted their empty for-sale units to the rental market. Worse, the surge in foreclosures pushed the number of excess vacant homes in the “held off market” category some 745,000 units above normal levels, rivaling the total number of excess vacant units that are for sale and for rent.

There continue to be real problems caused by the number of underwater homeowners — people who owe more on their mortgage than their house is worth, meaning that they would still owe the bank if they sold their home. Some of those most underwater choose to walk away — defaulting or “strategically defaulting,” leaving their home in the bank’s hands and taking the hit to their credit scores. “Cramdown” or principal reduction programs would have prevented the rising tide of strategic default, which remains a threat to banks’ bottom lines and housing prices.

That said, the report notes, there is some hope that the significant drop in home prices will once again make homes realistically affordable for first-time buyers — rather than leveraging themselves, they can, if employed, save a deposit and obtain a good mortgage.

According to the broad S&P/Case-Shiller index, prices for low-end homes in most metropolitan areas registered the largest drops. On average, the declines at the low end of the market were more than 50 percent greater than those at the high end. This disproportionate loss of housing wealth has added to the pressures on low-income homeowners faced with job losses and heavy debt loads.

When nominal prices are rising, owners who get into trouble making payments or need to move can simply sell their homes for a nominal gain and pay off their mortgages. But when nominal prices fall, owners whose homes are worth less than their mortgages cannot sell at a gain. This impedes repeat sales and increases the likelihood of defaults. According to First American CoreLogic, roughly one-quarter of American homeowners with mortgages were underwater in the first quarter of 2010. Some 40 percent of these 11.2 million distressed owners are located in California and Florida. Nevada has the highest incidence of the problem, affecting 70 percent of homeowners with mortgages.

At the same time, though, steep price declines also bring critical improvements in first-time homebuyer affordability that will help to fuel recovery. Nationwide, the median sales price dropped from 4.7 times the median household income in 2005 to 3.4 times in 2009. When combined with low interest rates, this puts mortgage payments on the median priced home closer to median gross rents than at anytime since 1980. Among the 92 metropolitan areas consistently covered by NAR since 1989, price-to-income ratios in 21 are now below their long-run averages — some significantly so.

Still, there is little hope for a strong housing rebound — not with the sky-high unemployment rate and generally sluggish economy.