The current housing slump is far from over and is shaping up to be the worst in 50 years, according to an annual report on the state of the nation’s housing markets from the Joint Center for Housing Studies of Harvard University.

Drastic production cuts and deep price discounts in 2005-2007 helped shrink the inventory of unsold new homes from a mid-2006 peak of more than 570,000 to less than 500,000 in early 2008. But the number of homes entering foreclosure nearly doubled to 1.3 million last year, and vacant homes for sale rose 46 percent over two years, to 2.12 million.

"Until the number of vacant for-sale units on the market … falls enough to bring vacancy rates back down, house prices will remain under pressure," the report said. "Working off the oversupply will require some combination of the following: housing starts fall even further; prices decline enough to bring out new bargain-seeking buyers; interest rates drop enough to improve affordability; job growth improves; consumer confidence returns; and mortgage credit again becomes more widely available."

Single-family home prices in the first quarter of 2008 were down 12 percent from their October 2005 peak — 18 percent in real terms, after adjusting for inflation. A "dispiriting picture" of housing affordability issues nevertheless remains.

The report, "The State of the Nation’s Housing 2008," is more optimistic about medium- to long-term prospects, estimating that unless there’s a serious, prolonged economic decline or a marked cutback in immigration, the nation will gain 14.4 million new households between 2010 and 2020, compared with 12.6 million between 1995 and 2005.

For now, center director Nicolas Retsinas said mortgage rates have "barely responded" to aggressive easing by the Federal Reserve. While the supply of for-sale vacant units continues to grow, tighter underwriting standards have locked many would-be home buyers out of the market. And with home prices falling in most metropolitan areas, homeowners are remaining on the sidelines, he said.

Advertisement

The National Association of Realtors (NAR) national median single-family home price declined 6.1 percent from the fourth quarter of 2006 to the fourth quarter of 2007, while the S&P/Case-Shiller U.S. National Home Price Index fell 8.9 percent during the same period.

The narrower purchase-only repeat sales index from the Office of Federal Housing Enterprise Oversight — which excludes mortgages too large or too risky for purchase by Fannie Mae and Freddie Mac — fell 0.3 percent during that time.

The national statistics don’t reveal the larger price drops in many metro areas, the report said, and mask the speed declines spread across the country. At the beginning of 2007, quarterly data collected by NAR showed prices rising in 85 of 144 metro areas. By the end of the year, only 26 metro areas were still seeing price appreciation. In the fourth quarter, prices in 33 metro areas had fallen by 10 percent or more from their peak.

NAR’s figures showed fourth-quarter nominal house prices falling back to 2006 levels in 12 metros, to 2005 levels in 35 metros, to 2004 levels in 19 metros, and to 2003 or earlier levels in 16 metros.

How does the current downturn stack up against others in recent memory? The 12 percent drop in national home prices since the October 2005 peak (18 percent in real terms) exceeds the downturns of the early ’80s and early ’90s. Two and a half years after real prices peaked in November 1989, the real median price was down just 4 percent and the nominal price was up 6 percent. Two and a half years after the May 1979 peak, the real median price had fallen 8 percent and the nominal price had increased by 20 percent.

Those price drops may not have produced meaningful improvements in affordability, the report said.

Between 2001 and 2006, the number of "severely burdened" households spending more than half of their income on housing grew by nearly 4 million, to 17.7 million — or 16 percent of households. Another 39 million households were "moderately burdened" paying more than 30 percent of income on housing.

At current interest rates, the national median price would have to fall an additional 12 percent from the end of 2007 to bring the monthly payments on a newly purchased median-priced home back to 2003 levels, the report said. In 40 metros, prices would have to fall more than 25 percent.

If interest rates were to come down by a full percentage point, the report estimated that the national median home price would still have to decline by 2 percent to return to 2003 affordability levels.

Repeat home buyers would not see affordability gains from such price drops because they would have to sell their homes at discounts similar to those on the home they would buy, the report said.

The boom-bust housing cycle has been reflected in the home-ownership rate. From 1994 to 2004, the home-ownership rate surged by five percentage points, peaking at 69 percent. Since then, home-ownership rates have fallen back for most groups, including a nearly two-point drop among black households and a 1.4-point drop among young households. The number of renter households increased by more than 2 million from 2004 to 2007, lowering the national home-ownership rate to 68.1 percent.

Once the oversupply of housing is worked off and home prices start to recover, the use of automated underwriting tools, a return to more traditional mortgage products, and the strength of underlying demand should put the number of homeowners back on the rise, the report said.

Although the short-term prospects for a recovery remain uncertain, in the long run the downturn is unlikely to slow down the creation of new households — unless the economy enters a sharp, prolonged recession that dampens immigration or slows household formation, the report said.

A weak economy could slow the rate of immigration, which is largely driven by the availability of U.S. jobs. The report identifies the main risk to the long-run outlook as a dip in the level of immigration from its recent 1.2 million-a-year pace due to weaker labor markets.

Minorities contributed more than 60 percent of household growth in 2000-2006, and they now account for 29 percent of all households, up from 17 percent in 1980 and 25 percent in 2000. The minority share is likely to reach about 35 percent by 2020, the report said.

The report projected that minority household growth among 35- to 64-year-olds should remain strong in 2010-2020, while the number of white middle-aged households will begin to decline after 2010 as baby boomers reach retirement age.

People living alone are expected to account for 36 percent of household growth between 2010 and 2020, and 75 percent of the 5.3 million projected increase in single-person households will be among those 65 and older.

***

What’s your opinion? Leave your comments below or send a letter to the editor.

Show Comments Hide Comments
Sign up for Inman’s Morning Headlines
What you need to know to start your day with all the latest industry developments
By submitting your email address, you agree to receive marketing emails from Inman.
Success!
Thank you for subscribing to Morning Headlines.
Back to top
Only 3 days left to register for Inman Connect Las Vegas before prices go up! Don't miss the premier event for real estate pros.Register Now ×
Limited Time Offer: Get 1 year of Inman Select for $199SUBSCRIBE×
Log in
If you created your account with Google or Facebook
Don't have an account?
Forgot your password?
No Problem

Simply enter the email address you used to create your account and click "Reset Password". You will receive additional instructions via email.

Forgot your username? If so please contact customer support at (510) 658-9252

Password Reset Confirmation

Password Reset Instructions have been sent to

Subscribe to The Weekender
Get the week's leading headlines delivered straight to your inbox.
Top headlines from around the real estate industry. Breaking news as it happens.
15 stories covering tech, special reports, video and opinion.
Unique features from hacker profiles to portal watch and video interviews.
Unique features from hacker profiles to portal watch and video interviews.
It looks like you’re already a Select Member!
To subscribe to exclusive newsletters, visit your email preferences in the account settings.
Up-to-the-minute news and interviews in your inbox, ticket discounts for Inman events and more
1-Step CheckoutPay with a credit card
By continuing, you agree to Inman’s Terms of Use and Privacy Policy.

You will be charged . Your subscription will automatically renew for on . For more details on our payment terms and how to cancel, click here.

Interested in a group subscription?
Finish setting up your subscription
×