A growing housing imbalance.

Author:England, Robert Stowe
Position:Cover Report: Industry Trends

The housing sector has struggled in recent years to find some balance between supply and demand. But equilibrium on a national scale seems to be slipping further away. As a result, a fully recovered housing market may not return until 2016.


Since the peak of the housing bubble in 2006, the housing sector has been struggling to find a bottom--so far without success.* There is still too much supply and too little demand. Indeed, lately it seems the imbalance of supply and demand has widened rather than narrowed, further postponing the date for a full recovery. * In the long process of healing in the housing sector, where are we today? "I think we are close to five years through a 10-year adjustment process," says Douglas Duncan, chief economist at Fannie Mae. "That's roughly parallel to the time it took to get to the crisis point." That would put the full recovery in 2016.* Duncan traces the beginning of the downturn to December 2006, when HSBC Holdings plc, London, announced it would be taking a $9 billion write-down in its investment in Household Finance, a company active in subprime lending. (The write-down ended up higher at $10.5 billion when earnings were filed.) * "There were other things that happened prior to that, but that was kind of the first big shock to the market [signaling] that there were going to be serious problems," Duncan says. That was nearly five years ago, he notes. "We have five more years to go from here" until the housing market returns to normal, he adds. * Duncan identifies a number of issues that stand in the way of a full recovery. For starters, there is the matter of dealing with a host of new regulations that will alter the shape of the banking industry, especially mortgage banking.* Also, there are 350 rulemakings overall to come from the Dodd-Frank Wall Street Reform and Consumer Protection Act, Duncan points out. "That whole rulemaking process is not only going to take time, but it is also going to take time for markets to adjust to it," he adds. He estimates two years to get all the rules issued and more years after that for the markets to adjust to them.

Even after the Dodd-Frank rules are in place, "We will not have dealt with the Fannie Mae, Freddie Mac, secondary market structure issue," he says. "So, it's easy to see how we can get out to something approximating 10 years before the market framework is stable."

Beyond the issue of regulatory barriers, there's the question of when the new-home market might return to normal, signaling a full recovery.

With a huge shadow inventory of homes yet to come on the market, the need for new housing is virtually nonexistent. Duncan does not see housing recovering to a normal level to meet growing demographic demand until late 2014. When housing returns to normal levels, it can resume its substantial--if not critical--role in driving economic growth, Duncan says.

Souring consumer sentiment

Meanwhile, the problem with insufficient home-buying demand appears to be getting worse, not better, according to Fannie Mae's surveys of consumer sentiment.

Fannie Mae began surveying consumer sentiment in June 2010. It was not until the company had accumulated more than a year's worth of data that it began to release in July 2011 the results of the survey, along with comparisons to year-ago levels.

"Basically, if you look at the survey, consumers say, 'Well, we don't like the economy any better today than we did a year ago. In fact, we like it a lot less,'" Duncan says.

"So, the share of people who think the economy is headed in the wrong direction is now 70 percent in the July [2011] data release [for June 2011]. That compares to about 60 percent a year ago [in June 2010J and a low of 57 percent a couple of months back," he says.

Meanwhile, more consumers in Fannie Mae's survey than a year ago are reporting that their expenses are growing faster than their incomes. Consumer expectations are that house prices will remain flat, while they expect rents to increase. Finally, surveyed households also expect mortgage interest rates to remain flat, according to Duncan.

"So, with all the uncertainties out there, [surveyed households] are basically asking the question, 'Why do you think now is a good time for us to borrow $200,000 to buy a house?,'" Duncan says.

The bottom line, he adds, is that demand is weaker, as there are still a lot of foreclosures for the housing market to work through to bring supply back in line with demand.

Weak consumer demand for housing is now being driven more by worries about the economy than by worries over the housing sector, according to Duncan.

"While housing is obviously central to the issue, the concern of households about the larger economy and their prospects going ahead has actually surpassed issues related to housing specifically," he says.

Do people think homeownership isn't worth it anymore--or just not worth it right now? "I think it is 'not worth it right now,'" Duncan answers.

"Actually, it is [more], 'Why take the risk right now because we don't believe the housing market is going to make any dramatic moves anytime soon, so we'd like to be more certain about our own financial situation before we make a move.'"

In Fannie Mae's latest quarterly survey, released in August, which has different questions than those asked in the monthly survey, Fannie Mae found that 26 percent of households in which people are currently employed said they were concerned about the prospects for remaining employed.

Combining that 26 percent with the 9 percent who are unemployed, "you have now taken out a third of the labor force in terms of the demand side of the equation," Duncan says. "And that's a big hurdle for housing to overcome." This worry about the labor market again points to household worries about the macro-economy, he adds.

Fannie Mae, too, has a less-than-rosy outlook. "We have significantly downgraded our macroeconomic forecast," Duncan says, to 1.4 percent growth for the second half of 2011. "It's 50/50 whether we go into another recession," Duncan says. For 2012, Fannie Mae forecasts a 2 percent growth rate.

"We need better than 2 percent growth to bring unemployment down. So that is, in my mind, the key issue with regard to the recovery of the housing market. If the labor market doesn't get going, then the housing market is not going to get going," he says.

Fiscal troubles not helping

Consumer sentiment dramatically worsened after the debt-ceiling debate in July in Washington did not yield results the public found satisfactory. Consumers saw that debate "as a proxy for longer-term fiscal issues," Duncan says.

"In one eye they have that, and in the other eye they are looking at the turmoil in Europe and saying, 'This obviously [affects me and] my interests; [and] if we don't get our situation under control, that's our destiny.'"

American consumers "are not happy about that destiny," he says, and that unhappiness is being reflected in the negative turn taken in consumer sentiment.

"I think that they are going to sit on their checkbooks waiting for the next election to see if there's some turn that's taken in terms of seriously addressing the fiscal situation," Duncan says. "That's why I think the broader macroeconomic issues are going to dominate."

Underscoring Duncan's point, the Consumer Confidence Index[R] plunged to 44.5 in August, down from a revised 59.2 in July. The number, published monthly by The Conference Board Inc., New York, moved down to its lowest level since April 2009, when the reading was 40.8--a long way from the 90 level that indicates the economy is on solid footing.

Duncan thinks Washington erred in not realizing how engaged Americans are in the deteriorating fiscal condition of the nation. "I think the public gets it. They're paying attention now. The survey data make that very clear," Duncan says. "I think that Washington [underestimates] the degree to which middle America has grasped the fundamentals."

If Washington had come together and achieved the $4 trillion in deficit reduction that the credit-rating agencies had suggested would be necessary to retain the AAA rating for the country's debt, it would have boosted the outlook for the housing market, according to Duncan.

"People will criticize me for making those statements and I understand why they would criticize that," Duncan says. "On the other hand, some economists...

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