Ivy Zelman’s view of the US housing market is gloomy, but it is probably the most realistic.

Ivy Zelman’s view of the US housing market is gloomy, but it is probably the most realistic.

A veteran Wall Street analyst, Ms Zelman, chief executive of the research firm Zelman & Associates, says it is unlikely that the US housing market will recover before 2009, adding that there is a ‘50 to 60 per cent chance of a recession’, as the housing slump curbs consumer spending.

Ms Zelman paints a much darker picture than Federal Reserve chairman Ben Bernanke, who said last week that housing will be a ’significant drag’ on the economy into next year.

When you consider the huge home inventories and tight-as-a-drum mortgage restrictions, it is easy to conclude that the housing slump could extend well past 2008. Unless financing loosens up and buyers return, her prophecy will become a reality.

‘I’ve never seen the market as bad as this,’ Ms Zelman said. ‘And it could get worse. The home-price decline could range from 16 per cent to 22 per cent.’ Monitoring inventory, builder incentives and demand, Ms Zelman is also watching adjustable-rate mortgage resets.

Homeowners with these loans will automatically face higher monthly payments that they may not be able to afford, another trigger for foreclosures or sales. Some US$500 billion of these loans will re-adjusted through 2008, Ms Zelman says.

While foreclosures have declined somewhat from August to September, they still doubled from a year ago, according to RealtyTrac Inc, which monitors the housing market. More homes are still coming on the market, and Ms Zelman says that will only add to the misery.

‘These are the worst inventories we’ve seen as a nation,’ she says. Ms Zelman originally presented her report on Oct 10 to the Home Improvement Research Institute, a trade group based in Florida.

Ms Zelman’s words carry some weight because she was one of the few major Wall Street analysts to warn of a housing decline months before it began late last year.

She was alarmed that home prices far outpaced personal-income increases during the boom, which is how the economic disconnect began. A bubble created artificially high demand that had to deflate sometime. Now, economists and analysts are trying to assess the collateral damage of the bust and sub-prime mortgage meltdown.

Meanwhile, builders are stuck with thousands of new homes they cannot sell and potential buyers are cancelling in droves or are unable to get a mortgage. Housing starts fell to a 14-year low in September.

‘Builders are desperate now and blowing through inventory,’ says Ms Zelman of homebuilders who are doing anything they can to sell homes. ‘Their revenues are shrinking so fast, they can’t keep up.’ The mass psychology that amplifies and spreads the angst of home sellers will put a brake on overall consumer spending, Ms Zelman predicts. ‘

Some 74 per cent of consumer expenditures are correlated to housing. I don’t think the consumer will hold up. They will cut back on things like buying cars and vacations.’ While Ms Zelman forecasts that sales will drop for the next two years, she is not as optimistic on home prices, which she says may continue falling until 2010 or 2011. ‘We’d be better off if prices corrected all at once. It will get worse before it gets better.’

Places where sales were strongest and speculators were most active before the bust will be bedeviled by high home inventories for more than a year. Cities that scored lowest with an ‘F minus’ grade, described as ‘very competitive with a negative bias’ in her firm’s September homebuilding survey, included San Diego, Phoenix, Inland Empire (California), and Fort Myers, Florida. Those rated ‘moderate and stable’ - a ‘C’ in their rankings - were Philadelphia; Raleigh, North Carolina; and San Antonio.

Areas connected to car-related job cuts in Michigan and Ohio will continue to feel pain. Not every market will get pummelled, though. Manhattan seems to be holding up for certain kinds of housing. Prices of co-op apartments with four bedrooms or more, for example, rose 19 per cent in the third quarter from a year ago.

Major markets with the lowest level of housing distress include Bethesda, Maryland; Boston-Cambridge, Massachusetts; and Manchester and Rockingham, New Hampshire. That is according to HomeSmartReports, a service that tracks six variables of home-market risk. ‘Boston is pretty moderate in terms of risk,’ says Mike Ela, president of the service. ‘Lenders have pulled back aggressively.’

But do not expect to land properties at bargain-basement prices. One assumption is that the best values will be in areas glutted with properties. Yet, many sellers will be holding out for prices that they saw at the peak of the boom. Motivated property owners, though, may be willing to deal.

If you are buying a second home or investment properties, keep in mind that your credit record should be up-to-date. You may also find it easier dealing with institutions that sell ‘real-estate-owned’ homes, or properties that went into foreclosure.

Mr Ela, who has ‘low-ball offers’ pending on two bank-owned properties, prefers dealing with institutions ‘because you’re not dealing with the emotion of the seller; it won’t take too long to get a decision’. Because lending standards have tightened, if there are any errors on your credit report that show missed payments or outstanding balances, you should get them corrected. Do not open any new lines you will not use and pay your bills on time. These variables will affect your score and may disqualify you from obtaining financing.

Keep in mind that job growth and consumer spending bear close scrutiny. If Ms Zelman is right about a recession coming, then prices may fall more, plunging the housing market into an even sorrier state. — Bloomberg

Source : Business Times - 25 Oct 2007