Housing Recovery? What Housing Recovery?

One long-standing skeptic about the housing market is Nouriel Roubini of RGE Monitor. You have to sign up for premium content to get his full story (he does give you an initial free peek), but you can get the drift of the gist from his synopsis, “The housing market is still far from bottoming out:”

Last summer I predicted that the current housing recession would end up being one of the worst in decades (see here and here and here). I elaborated these views in a wide series of long blogs and clearly pointed out already last summer that sub-prime mortgages would be a serious weak link in mortgages but that all of the mortgage market would eventually come under stress. At that time the consensus was talking about a housing “slowdown”. When it became obvious that the housing was not in a slowdown but in a severe recession the consensus spin moved to the view – that even Greenspan supported last fall – that the housing recession was “bottoming out”. The evidence for such “bottoming out” was between thin and non-existent, especially as both starts, completions and new home sales kept on falling; the only things that were rising in the comatose housing market were cancellations and an unprecedented glut of unsold new and existing homes.

To counter the prevailing view that housing is bottoming out my colleague Christian Menegatti and I just wrote and published a new long detailed analysis of the housing market titled “The US Housing Recession is Still Far from Bottoming Out”….We come to the conclusion that the current housing recession will indeed be one of the worst ones in decades and that, even in the most optimistic scenario of a soft landing for the US economy, the housing market is still very far from bottoming out. Of course, if a recession were to occur this year, the housing recession would be even more bleak than our already very negative benchmark scenario.

To be balanced rather than panicky or alarmist we decided to title the paper as “The US Housing Recession is Still Far from Bottoming Out”. But yesterday when our paper was published Mr. Tomnitz.- the CEO of DR Horton (the second largest home builder in the US) – loudly declared that housing will “SUCK” for all of the 12 months of 2007. He prefaced that remark by saying – almost comically – that he “did not want to be too sophisticated” but that housing sucks and will suck all of 2007 (“I don’t want to be too sophisticated here, but 2007 is going to suck, all 12 months of the calendar year”)….

Now even Greenspan – who last fall repeated the deluded consensus that housing was bottoming out – is speaking about a possible recession this year. Coming from a man whose Delphic words were usually so cryptic that you did not know whether he was talking about the economy or the weather, the fact that the Maestro repeated the dirty R-word three times in the last week should be a signal that he is now real worried about a recession….

Yale economics professor, author of “Irrational Exuberance,” takes a more measured tone than Roubini but is similarly downbeat about housing. From BusinesWeek, “The Bubble Guru’s Take On Housing:”

Looking at our national home-price index [the Standard & Poor’s/Case-Shiller Home Price Indices], it appears that the boom is over. [Prices] had been rising at an accelerating rate from the late 1990s through 2004. Since then the rate of increase has been decelerating.

We’re going through a peak. There hasn’t yet been a big price decline, like 20%. For instance, out of the 20 major cities in the country the biggest drops are in Detroit and Boston, which are down 5.9% and 5.1%, respectively. I think there’s a good chance home prices will be down 10% to 30% over the next five years.

Similarly, the weakness in housing has become so widespread that it is affecting employment in related industries. From MSNBC, “Weak housing market weighs on job growth:”

Since the middle of last year, a downturn in the U.S. housing market has taken its toll on a wide group of people and companies, clobbering homebuilders, condo flippers, borrowers with weak credit, lenders who oversold loans, and just about anyone with a home for sale.

Now the housing slump is hitting yet another target: housing-related jobs, a list that includes everyone from the people who build and sell houses to makers of appliances and furnishings.

That’s a sharp contrast to the height of the housing boom in 2005-06, when the industry was responsible for creating some 25,000 to 50,000 new jobs every month, according to Mark Zandi, chief economist at Moodys.com.

“In the recent months it’s been laying off workers at a pace of 25,000 to 50,000 per month,” he said. “And I think the next couple of quarters we’ll start seeing job losses of between 50,000 and 75,000 per month. … I think the housing market is going down a whole other notch.”

Update as of 1:30 a.m.: Felix Salmon’s blog makes, in his post “How convincing is Roubini’s argument that the housing recession will only get worse?” a critical reading of Roubini’s paper. It does sound as if Roubini’s efforts to make his assessment, which seems to be largely anecdotal and impressionistic, into something more rigorous, doesn’t work. But Salmon himself says Roubini could still well be right, his simple point is his charts don’t prove his case.

The most persuasive point, and inherently the data isn’t available to support it, is that there appears to be a considerable overhang in the housing market. So even if prices stabilize, the backlog coming on to the market makes the prospect of recovery any time soon less likely.

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