Thursday, I attended Standard & Poor’s Market View of Credit Risk summit here in New York. David Wyss, the Chief Economist of Standard & Poor’s was the keynote speaker giving an economic outlook for the remainder of the year and beyond. Despite him commenting on the overall economy, he spent much of the presentation focused specifically on the housing market. Here’s a summary of his discussion.
The Recession is Over
The recession officially ended in the 3rd Quarter of 2008. Wyss says that recessions are usually over when things are no longer getting worse. He commented that housing has stabilized and holiday spending was 2% higher in Q4 2009, than Q4 2008. “Consumers are no longer panicing. The panic is being replaced by fear,” says Wyss who in the past was a senior economist at the Federal Reserve Board and economic advisor to the Bank of England. He commented that that fear is much more healthy than the panic experienced at the end of 2008.
Real Estate Bubble was World Wide Problem
I thought this was important to note. Wyss mentioned how, with the exception of India and China, the housing bubble was a world wide bubble. Between 1997-2005 housing was up 70% world wide. Great Britain saw 155% gains, Spain 140%, Ireland 190%. Those markets are down as much as 50% today. Many Americans saw this as an American propblem because they are only reading American newspapers.
Real Estate Problems in US are Localized to Rust Belt and Sun Belt
Over 50% of the foreclosures have taken place in just 4 states, Nevada, California, Florida, and Arizona. Further problems are in places in and around Detroit which saw the US Auto Industry plummet taking real estate prices with it. The median price of an apartment in Manhattan is now the same as the median price of 50 homes in Detroit ($1million vs $20,000).
The bulk of the Sunbelt problems were related to speculation, 2nd homes, and investors. He said investors are acting very “rationally” by walking away from those poor investments. That is creating a clearing out process which is healthy for any recovery.
Lack of Building is Creating a Shortage of Homes
Wyss reiterates what I discussed regarding a potential housing shortage. Each year 1.6million new homes need to be built to keep up with demand. New housing starts meanwhile are hovering around and annualized 575,000 falling 5.9% according to the commerce department. Simultaneously new home sales just hit another record low. Because of this, Wyss says the market has already absorbed over 1million units of excess inventory and by the end of this year the market will have shrunk by 2.5million units. This is healthy, though obviously not a great sign for the economy. He estimates around 18-24 months from now inventories of homes will be at healthy levels.
Real Estate is a Bargain Now but Prices Will Drop Another 5-6%
At the peak of the bubble, homes were, on average, 340% of average household income. Prices now sit at 240%, which is below historical averages. However due to foreclosures peaking Wyss projects another leg down for real estate but softening only another 5-6% nationwide.
The US Consumer has lead us out of all the recessions in the past through spending but right now Americans aren’t spending and job growth isn’t happening at a fast enough pace. One thing he said regarding unemployment that resonated with me. “Baby-boomers saw their 401ks become 201ks with the stock market decline. This forced many near retirement to stay in the labor market and continue to work, which in turn caused there to be limited job availability for new college graduates making the unemployment situation worse.” This creates less demand for housing and many of those graduates are staying home with mom and dad instead of finding jobs and ultimately buying homes. His prediction was this would be a very temporary trend and resolve itself in the next 24 months.
Wyss predicts the inventories will shrink, foreclosures will wane, and the impact of the commercial market downturn will be smaller than everyone is predicting. He sees the housing market mostly stabilized now. Prices will trend down slightly over the next 12 months and then turn around as the inventory contracts over the next 24 months.
For investors, I feel his comments are in line with many other economists and real estate thought leaders. A wisdom of crowd consensus is forming that shows the panic truly is gone, fear is subsiding in the real estate market , and we’re on the path to recovery. Wyss did mention slight trending up in mortgage rates this year which at this point reaffirms a smaller window to lock in at near record low rates. The opportunities to purchase though will remain until the shadow inventory is resolved.
Photo by Ryan Hinricher