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RISMEDIA, February 5, 2009-As economic data continue to mount, it is becoming increasingly clear that fourth quarter GDP likely fell by about 5 percent at an annual rate, the largest contraction in almost 25 years. Early data readings for January indicate a similar fate for the first quarter of this year. It is clear that weak economic activity will offer a bleak backdrop for the next two quarters for the housing markets. The housing sector is expected to scrape bottom during the first half of this year.

Most economic projections expect a dismal first half of the year for the U.S. economy with job losses mounting, a contracting industrial sector and weak consumer spending. The positive influence of an accommodative monetary policy combined with an expected fiscal stimulus package to be implemented sometime in February will likely impact the economy in the second half of the year. So the housing sector faces a serious challenge during the first half of this year.

Have We Hit Bottom?

The trillion dollar question is, has the housing sector already hit bottom for home sales or can it go lower due to the economic downturn? Over a year ago it was a contracting housing sector that led to an economic downturn; now the roles are reversed. A slumping economy is, in turn, keeping households from buying homes. Many households just do not have the financial wherewithal to purchase big ticket items like homes and automobiles. Household wealth is down considerably and millions of people are losing their jobs. There were two million job losses last year and an equal amount of losses are expected this year. Confidence has plummeted to all-time lows and businesses are cutting prices and production.

Existing home sales are now at a cyclical low registering 4.49 million annualized sales in December. Similarly, new home sales hit a cyclical low of 410,000 annualized sales in December. If the economy continues to contract and continues to shed jobs at the current pace, it is likely that home sales have not yet hit bottom. In a previous commentary, we estimated that it is possible – in today’s tighter credit underwriting environment which has essentially eliminated the Alt A and subprime mortgage products – for existing home sales to bottom out at about 4.21 million homes annualized. That was an academic exercise but given the state of the economy, may not be too far off from the current 4.49 million levels.

Housing is Poised to Recover

If there is any good news in all of this it is that the housing sector is poised to recover when the economy turns the corner. According to the National Association of Realtors’ affordability index, affordability is at the highest level since 1973. Home values have dropped by over 20 percent as measured by the Case Shiller 20 city home price index and mortgage rates are at historical lows. Over the past several months it has been clear that there is some pent-up demand for purchasing homes because of improved affordability conditions. Mortgage applications to purchase homes have increased in response to lower mortgage rates, only for a meaningful number of households to be denied a mortgage loan because of tighter underwriting standards. The fallout rate on mortgage applications is currently at cyclical highs.

Given the current projections for a sluggish economy, it is likely that both new and existing home sales will hover near their cyclical lows during the first half of this year. Demand for home buying will be constrained by job losses, decreased wealth and income, lack of confidence, and postponed purchases due to the anticipation of falling prices. The supply of homes is likely to hover at or near double-digit levels because of an increasing number of foreclosure properties adding to inventory.

Second Half Recovery?

On a positive note, sometime during the second half of this year, foreclosure numbers are likely to come down if government rescue programs prove effective, and the demand for home purchases is likely to increase if the recession shows signs of recovery, resulting in the beginnings of a long awaited housing recovery. Fingers and toes crossed.


This past week’s economic and housing releases continued to exhibit weakness in the economy and real estate markets. Jobless claims for the week ending January 17 rose 62,000 to 589,000. This increase takes the level of jobless claims back to the high levels before the holidays. Claims are now at levels that reflect severe labor conditions. Housing starts and housing permits both fell in December to their lowest levels since World War II. Starts were down 15.5 percent in December to 550,000 while permits were down 10.7 percent to 549,000. The dramatic declines in new residential construction activity reflect a severe downturn in the building industry with no good news yet in sight.

The National Association of Home Builders’ index fell to a new record low of 8 in January. This is an index of builder confidence and is consistent with the housing start and permit numbers. Builders have little confidence in the near-term outlook for their industry. According to the Federal Housing Finance Agency price report, home prices in November decreased 1.8 percent from a month earlier and 8.7 percent from a year ago. The home price declines in this report have accelerated over the past few months and there were declines registered in all nine Census Bureau regions in the nation. Finally, existing home sales for December were up 6.5 percent to 4.74 million annualized sales. Despite the increase, the level of sales remains below 5 million, reflecting a very weak housing market constrained by a deep economic recession. The months’ supply fell dramatically to 9.3 in December from 11.2 in November; but most of the decline is attributed to unusual seasonal factors and the pick-up in the pace of home sales. We expect the months’ supply to likely increase in the coming months.

David A. Lereah, president of Reecon Advisors, is a recognized expert in real estate economics and financial services. Dr. Lereah was Senior Vice President and Chief Economist of the National Association of Realtors and Chief Economist for the Mortgage Bankers Association of America. This commentary first appeared in the Reecon Advisory Report, an independent source of news, insight and intelligence on the real estate economics that are shaping real estate markets. For more information, go to