Housing Slump in U.S. May Lead to First Drop Since Depression
By Kathleen M. Howley and Matthew Benjamin
Sept. 18 (Bloomberg) -- Nancy and Brian Christopherson are asking $389,900 for their eight-room Colonial Revival home in Westford, Massachusetts, antiestéticaturing a new kitchen with maple cabinets. Even at that price, they'll lose $14,100.
Monthly price reductions since they listed it in May for $429,900 have lured no offers for the house, bought for $369,000 in 2004. ``It's getting scary,'' says Nancy Christopherson.
The sharpest slowdown in U.S. home-price growth in three decades is trapping owners with mortgages they can't afford, pushing unsold homes to a record 4.42 million and gutting profits for builders such as Lennar Corp. and Toll Brothers Inc. The U.S. median home price next year may fall for the first time since the Great Depression, says Gabriel Stein, chief international economist with Lombard Street Research in London.
Economists such as Nobel laureate Joseph Stiglitz warn that the reduced sales may push the world's largest economy into recession, and concern is mounting over economic growth in Europe and Canada. The Federal Reserve will reduce its U.S. benchmark lending rate, says Jan Hatzius, chief U.S. economist with Goldman Sachs Group Inc. Last month, the central bank ended a two-year streak of 17 increases that pushed the rate to 5.25 percent, citing cooling home sales.
``The housing slowdown will be a large drag on economic activity,'' Hatzius says. ``The Fed will cut rates to 4 percent next year as the housing downturn starts to push up the unemployment rate.''
Wealth Effect
Five years of record home sales and price gains supported the U.S. economy through an Internet stock plunge, terrorist attacks on New York and Washington, bankruptcies at Houston-based Enron Corp. and Clinton, Mississippi-based Worldcom Inc., U.S. invasions of Afghanistan and Iraq and a surge in oil prices. At the New York Mercantile Exchange, crude oil futures for October delivery more than doubled to $63.48 a barrel, as of Sept. 15, from $28.81 on Sept. 17, 2001.
The housing boom lifted the U.S. median home price by 49 percent in the five years ended in 2005, the Chicago-based National Association of Realtors says, adding to the net worth of homeowners and creating a so-called wealth effect that spurred spending as homeowners refinanced and took on more mortgage debt.
U.S. Treasury Secretary Henry Paulson, meeting G-7 finance ministers in Singapore Sept. 16, said higher wages, ``strong'' company profits and business spending will offset a weaker housing market to propel U.S. economic growth.
Stiglitz, a professor at Columbia University in New York and winner of the Nobel Prize for Economics in 2001, is less upbeat. ``There's a real problem not just for the housing sector but for the whole economy,'' he says. ``There is a significant possibility of a slowdown so large that it falls into the category of a recession.''
Deceleration
The median U.S. price for an existing home hasn't fallen since the Great Depression in the 1930s, says Lawrence Yun, an economist with the association. That's the estimate cited by economists, based on extrapolations from the group's home price data, the oldest set, going back to 1968.
``House prices could fall in 2007, with effects on both growth and monetary policy,'' Stein says.
U.S. average home-price growth slowed to 1.17 percent during the second quarter from 3.65 percent a year earlier, the Office of Federal Housing Enterprise Oversight said in a Sept. 5 report. That's the sharpest plunge since the agency began keeping records in 1975.
The National Association of Realtors may report on Sept. 25 a decline in existing home sales for the fifth straight month, says David Lereah, the group's chief economist. The Commerce Department reports new-home prices and sales on Sept. 27.
Pressure on Sellers
``For the next couple of months, we're probably looking at between zero to a five percent drop in prices,'' Lereah says. ``The only way for home sales to come back, and for inventories to start to diminish, is for sellers to start to bring prices down.''
Not all homeowners are willing to accept less. Roxy Allen, 54, listed her four-bedroom house in Littleton, Colorado, for sale in May. She dropped the price once to $339,900 from $352,000 and has refused to go lower. She hasn't received a single offer.
``The Realtor wants you to just make a deal with somebody and sell it for cheap,'' Allen says. ``Why would I sell my house for less and buy one for more?''
Owners such as Allen can stay put if they don't like the condition of the real estate market. Peter Francisco, who owns a three-bedroom ranch in East Harwich, Massachusetts, on Cape Cod, has fewer options.
The U.S. Coast Guard lieutenant was transferred to Norfolk, Virginia, in July and put his house on the market in August at a price lower than he wanted: $379,900. The house across the street, similar to his own, sold last year for $425,000.
Burning Equity
``If you have to go, you have to take what you can get,'' says Francisco, 29. So far, he has no offers.
Americans have already spent much of their new-found equity, making them vulnerable to slumping prices. Homeowners cashed out a record $243.9 billion of home equity with mortgage refinancing in 2005, adding to the $483.5 billion extracted in the previous four years, according to Frank Nothaft, chief economist of McLean, Virginia-based Freddie Mac, the world's second-largest mortgage buyer.
The money is often used to renovate homes, buy cars, and pay credit-card debt, he says.
Recession Concern
Housing demand is important to U.S. economic health. The housing industry contributed about $2 trillion to the U.S. economy last year, accounting for 16 percent of growth as sales of previously owned homes rose to a record 7.08 million, says Thomas Stevens, president of the National Association of Realtors.
When related purchases such as furniture and appliances are included, housing accounted for 23 percent of 2005's gross domestic product, according to the Joint Center for Housing Studies at Harvard University in Cambridge, Massachusetts.
The housing slump may have consequences beyond U.S. borders. The Bank of Canada left interest rates unchanged on Sept. 6 in part because U.S. spending may ``slow more rapidly than expected,'' the bank said in a statement. European Central Bank President Jean-Claude Trichet cited the U.S. real estate market last week as a source of economic concern.
Economic data show the slump is deepening. An index of signed purchase agreements for previously owned homes in the U.S. fell 7 percent to 105.6 in July, the biggest slide since the Sept. 11 attacks five years ago, the real estate agents association said this month. New-home sales, recorded when contracts are signed, fell to 1.07 million on an annualized basis in July, a drop of 22 percent from a year earlier, the Commerce Department said Aug. 24.
Mortgage Index
An index measuring mortgage applications from people who are purchasing homes stood at 410.2 for the week ended Sept. 8, ticking up 5.3 percent from the previous week, though down 20 percent from the 513.4 a year earlier, according to the Washington-based Mortgage Bankers Association.
``It's called `How low can you go?''' says Doreen Kelly, 52, who has dropped the price three times on her Westport, Connecticut, farmhouse to $799,900 after listing it in May for $938,000. ``The gains the real estate market made in the last three years just got wiped out on this particular house.''
Hatzius, the Goldman Sachs economist, estimates the housing slowdown will cut 1.5 percentage points from U.S. economic growth in 2007 as builders cut back on labor and materials and homeowners spend less as home values erode.
Construction spending dropped in July by the most since 2001, the Commerce Department said in a Sept. 1 report. Horsham, Pennsylvania-based Toll Brothers reported a 19 percent slump last month in profit for the quarter ended July 31.
Builder Profits
Hovnanian Enterprises Inc., New Jersey's largest homebuilder, said on Sept. 6 profit fell 34 percent in the same period. In the past two weeks, Miami-based Lennar, KB Home of Los Angeles, and Beazer Homes USA Inc. in Atlanta lowered profit forecasts. The Standard and Poor's Supercomposite Homebuilding Index of 16 stocks fell 28 percent this year through Sept. 15 as orders for new homes slumped.
Existing home sales probably will fall 7.6 percent to 6.54 million this year and house-price gains may trail inflation for the first time since 1992, rising only 2.8 percent, according to the National Association of Realtors. New home sales, typically 15 percent of a year's real estate transactions, likely will slump by 16 percent and price gains slow to 0.2 percent, the smallest increase since 1991, the group says.
``With rising interest rates, homebuyers have become exhausted financially,'' the associations' Stevens told the U.S. Senate Banking Committee on Sept. 13.
As mortgage rates increased in the second quarter, making financing more expensive, the median price of existing homes fell in some areas, including Massachusetts, upstate New York, Connecticut, Florida, Virginia and Ohio -- regional declines that are likely to spread, the group says. The average U.S. rate for a 30-year fixed mortgage was 6.4 percent for the week ended Sept. 15, up from 5.7 percent a year earlier, according to Freddie Mac.
The Christophersons are in a bind after 27 showings of their four-bedroom Massachusetts home, where they spent $35,000 on a new kitchen. Brian is setting up his dental practice in Mesa, Arizona, and Nancy and their five children have packed up and moved there. So the family is now carrying two mortgages.
``We're going to hold on as long as we can,'' says Nancy Christopherson, 36.
`In a Pickle'
Not all parts of the U.S. are suffering. Home prices rose in the second quarter from a year earlier in areas such as Ocala, Florida; Portland, Oregon; Port Arthur, Texas; and Farmington, New Mexico.
Some sellers across the U.S. must reduce their expectations, even those who don't move. Edward Brown, 47, a Florida real estate investor, says he's financially overextended and needs to sell a three-bedroom house in Cape Coral, Florida. He's asking $579,000 -- $20,000 less than he paid for the property a year ago.
``No one expected the market to drop so quickly,'' he says. ``There are a lot of people like me who are caught in a pickle.''
