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US housing rebound to be prolonged: Harvard study

(Agencies)
Updated: 2008-06-23 15:25

NEW YORK - Record foreclosures and limited access to credit will make it harder than usual to rebound from this US housing market slump, the worst at least since World War Two, according to a Harvard University study on Monday.

A two-year home price drop is eating into housing wealth, curbing consumer spending and slicing away economic growth. This is unlikely to change until potential home buyers are convinced that prices have stopped tumbling, the study found.

The downturn has room to run.

The highest home loan rates in nine months and strict lending standards are keeping buyers on the sidelines, even after aggressive Federal Reserve intervention and a 16 percent national home price slide from the 2006 peak, by some measures.

"Historically, housing markets recover only after the economy has entered a recession and a combination of falling mortgage interest rates and house prices have improved housing affordability," Nicolas P. Retsinas, director of the Joint Center for Housing Studies at Harvard, said in a statement.

"It will take longer this time to rebound given the unusually high levels of foreclosures and constrained credit markets," he said. "The slump in housing markets has not yet run its full course."

Price declines and mortgage defaults are the worst on records dating back to the 1960s and 1970s, the study noted. Job losses and falling prices intensify risk of foreclosure.

The number of homes entering foreclosure nearly doubled to 1.3 million in 2007 from about 660,000 in 2005.

Payment shock after rate resets on some adjustable loans, many made to higher-risk borrowers, has propelled owners into foreclosure. For others in trouble, falling prices leave them with mortgages larger than the home's value, and they are often unable to refinance or sell.

Also, new homebuilding and house sales rival the worst downturns in the post World War Two era.

The number of homeowners paying more than half of their income on housing surged by 35 percent to 8.8 million in 2006 from 6.5 million five years earlier, according to the study, the center's 20th annual broad report on US housing trends.

After rising for years, the US homeownership rate fell to 67.8 percent at the end of 2007 from an all-time high 69 percent in 2004.

"As investors demand a higher return for assumed risk and limit credit to riskier borrowers, costs are rising for all types of mortgage, consumer and corporate loans," the center said in a press release. "Many would-be borrowers are now finding it impossible to get loans at any price."

Economic weakness does not bode well for income growth in the short run, and housing cost pressures are unlikely to lighten in the long term. Much of employment growth will be in part-time and low-wage positions, the study said.

"The somber conclusion is that if the economy slips into recession or job losses keep racking up, household growth and homeownership demand could fall even more," the center said in the release.

Barring a prolonged period of serious economic decline, the study projects household growth of about 14.5 million over the next 10 years. The main risk to that outlook is a drop in immigration from its recent 1.2 million annual pace due to weaker labor markets.

To get home affordability back to levels of 2000, before a five-year record home price and sales surge, "would take some combination of large price declines, interest rate reductions, rent deflation and unprecedented real income growth," the study said.

Even then, homes were out of reach for many "vulnerable households" often made up of low-wage workers, families with children and veterans.