Moody’s Economist Sees Ten-Year Housing Recovery

Written by: Steve Cook   Tue, September 22, 2009 Beyond Today’s News, Forecasts

It will take more than a decade for housing markets to regain the ground that has been lost since 2006 predicted a top economic researcher with Moody’s yesterday, the second leading housing economist to issue a gloomy recovery forecast in the past week.

Celia Chen, senior director of the Moody’s research staff, said, “For many reasons, the rebound will be disproportionately small compared to the decline,” Moody’s said this week in its latest outlook on the residential market. “It will take more than a decade to completely recover from the 40 percent peak-to-trough decline in national home prices” in Moody’s latest outlook on the residential market.

Despite the ongoing challenges facing the U.S. housing market such as rising foreclosures and a supply glut, the rally in home-builder stocks shows investors are hopeful the worst is over. The sector has doubled from the March lows, the report said.

Moody’s said the home-building industry will rebound, “but a lingering overhang of inventories, combined with consolidation in the industry and caution on the part of both home builders and lenders to builders, will keep the pace of construction from reaching the peak it achieved at the end of 2006.”

On home values, the report said price volatility has been “particularly wild” during this housing cycle, with a giddy run-up followed by the dramatic crash. However, prices “will behave in a much more moderate manner during the recovery.” Moody’s predicts home prices “will remain at a persistently lower level than we anticipated prior to the crisis, and it will take a full decade from the 2010 bottom just for the  national index to climb back to its 2006 peak.”

The forecast signals a dramatic shift from her views a year ago.  In an interview on NPR in August 2008, Ms. Chen predicted home prices would hit “absolute bottom” in the spring of 2009. “If you’re buying to live in a house, it’s probably OK to purchase a house now,” says Chen. “It’s probably better if you wait a little longer,” she said at that time.

At a conference hosted by Fitch Ratings a week ago, Dennis Capozza of University Financial Associates said that home prices will continue to fall over the next five years, though the greatest declines have already occurred this year and property value reductions will gradually decrease until 2014.

 Comparing the current crisis to the recession of the early 90s, Capozza said housing prices will again trail the overall economic recovery, he said.  However, the severity of today’s situation will drive prices lower and lengthen the time it will take housing prices to begin to appreciate, compared to the recession eighteen years ago.

 Local economic conditions, especially excess supply, rather than underwriting or moral hazard, are the primary causes of falling prices.  Unemployment today is greater than the recession in the early 90s, driving borrowers who are already underwater into default and impacting on the economy negatively.  Though foreclosures are peaking now, a four and a half month excess supply is creating a huge overhang, Capozza said.

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