Housing in Crisis: When Will Metro Markets Recover?
Near-term prospects for housing markets in a recessionary environment
SUMMARY
Despite the darkening national economic outlook and the weak conditions in the housing market, some positive signs give hope that housing is about to hit bottom. Housing in Crisis: When Will Metro Markets Recover?, a comprehensive new study, evaluates the near-term prospects for housing markets in a recessionary environment.
KEY FINDINGS
- House prices will stabilize by the end of this year.
- The national Case-Shiller house price index will decline by another 11% from the fourth quarter of last year for a total peak-to-trough decline of 36%.
- By the end of this unprecedented downturn, house prices will have declined by double digits peak to trough in nearly 62% of the nation’s 381 metro areas. In about 10% of metro areas, price declines will exceed 30%.
AUTHORS
- Mark Zandi, Chief Economist
- Celia Chen, Senior Director, Housing Economics
- Cristian deRitis, Director, Credit Analytics
- Andres Carbacho-Burgos, Economist
ADDITIONAL INFORMATION
Table of Contents
Table of Contents
Chapter 1: Housing Bust Worsens
Dismal conditions
Housing rebalances
Chapter 2: How Did the Market Unravel?
Foreclosure waves
Financial system losses
Financial panic
Economic fallout
Chapter 3: Policymakers Respond
Financial market stabilization
Foreclosure relief
Fiscal support
Lowering borrowing costs
Meaningful support
Chapter 4: When Will It End?
Risks
Chapter 5: House Price Primer
NAR
FHFA
Loan Performance
Fiserv Case-Shiller and S&P/Case-Shiller
Zillow
Radar Logic
Altos
Advantages of CSI
Chapter 6: Measuring House Price Risk
Income-to-price
Affordability
Price-to-rent
User cost-to-rent
Chapter 7: Structural Econometric Model
Theory
Historical data
Equilibrium equation
Adjustment equation
Validation
Alternative Specifications
Calibration
Valuation
Chapter 8: Forecast Accuracy
National accuracy
Regional accuracy
U.S. regional forecast consistency
Conclusion
Chapter 9: House Price Outlook
House price decline
House-price recovery
Chapter 10: Metropolitan Area Outlook
Central Valley, CA
Southwest, FL
Southeast, FL
Riverside-San Bernardino, CA
Phoenix, AZ
Las Vegas, NV
Central, FL
Los Angeles, CA
San Diego, CA
Tampa, FL
Greater Washington
Detroit, MI
San Francisco Bay Area, CA
New York, NY
Chicago, IL
San Antonio, TX
Indianapolis, IN
Little Rock, AR
Pittsburgh, PA
Houston, TX
Chapter 11: Conclusions
Appendices
From the Executive Summary
Executive Summary
The U.S. housing market downturn has gone from bad to worse, dragging the broader economy into what threatens to be the worst economic setback since the Great Depression. Policymakers have not yet been able to break the downward spiral that has developed among the sinking housing market, job losses, frozen credit markets, and rising foreclosures.
Almost three years into the housing downturn, most indicators of the market's performance continue to worsen. By the end of 2008, construction had fallen to its slowest pace since the Census Bureau began collecting data in 1959, inventories of homes were at a record high, and house prices had plummeted. Home sales seemed to be stabilizing, but only because of a surge in sales of foreclosed properties. Rising job losses and mounting negative home equity, combined with lax mortgage underwriting standards earlier in the decade, have rapidly eroded mortgage credit quality, further depressing the market.
The housing bubble was inflated by numerous forces. The most important were the flawed process of mortgage securitization, a lack of regulatory oversight, and old-fashioned hubris. The bubble is now deflating with a vengeance. The boom began to recede in earnest in the spring 2006 selling season. The surge in prices during the first half of the decade, along with monetary tightening by the Federal Reserve, had made housing unaffordable, even with anything-goes mortgage lending. House prices have since fallen by 25%, bringing prices back to where they were at the beginning of 2004.
The erosion of credit quality fueled the financial market crisis, which further depressed the housing market. Financial institutions are taking hundreds of billions of dollars in losses from the bad mortgage-related investments they made during the boom. These losses fed the financial panic that hit a fever pitch at the end of last summer after the government took over Fannie Mae and Freddie Mac. Credit markets froze, hurting not only mortgage borrowers but also disrupting nearly all businesses. These forces sent a mildly contracting economy into a full-blown recession.
Not only is this housing downturn unprecedented in depth, but it reaches across the nation. House prices have fallen in about 70% of all metro areas over the past several years. Although prices in most metro areas declined modestly during this period, price depreciation from peak exceeded 5% in 116 metro areas and exceeded 20% in about 50 metro areas. Those metro areas with the most exposure to nonprime and investor lending, and that consequently experienced the greatest runup in prices during the boom, are suffering the greatest declines on the downside of the housing cycle. California and Florida prices, for example, have descended by 50% or more from peak, but no area of the country has been spared.
Despite the darkening national economic outlook and the weak conditions in the housing market, some positive signs give hope that a bottom in the housing market is coming into view...
