Tuesday, 23 October 2007

Zelman paints a sobering picture of US housing

Ivy Zelman is one of the more pessimistic on the outlook for US housing but as the article says, probably one of the most realistic.

U.S. Housing Decline Threatens to Last Into 2009:

Ivy Zelman's view of the U.S. housing market is gloomy, but it's probably the most realistic.

A veteran Wall Street analyst, Zelman, chief executive of the research firm Zelman & Associates, says it's unlikely the U.S. housing market will recover before 2009, adding there's a "50 to 60 percent chance of a recession," as the housing slump curbs consumer spending.

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's 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," Zelman said. "And it could get worse. The home-price decline could range from 16 percent to 22 percent."

Monitoring inventory, builder incentives and demand, 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 $500 billion of these loans will re- adjust through 2008, 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. Since more homes are coming on the market, Zelman says that will only add to the misery.

`Worst Inventories'

"These are the worst inventories we've seen as a nation," she says. Zelman originally presented her report Oct. 10 to the Home Improvement Research Institute, a Tampa, Florida-based trade group.

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 subprime mortgage meltdown.

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

Mass Psychology

"Builders are desperate now and blowing through inventory," says 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, Zelman predicts.

"Some 74 percent 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 Zelman forecasts that sales will drop for the next two years, she isn't 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.

Click on the link for the full story. Whilst consumers are slowly waking up to the fact that housing prices don't always go up. They are yet to take on board the type of thinking that sees home prices falling for the next 3 - 5 years. A scenario that Robert Schiller of Case Shiller fame keeps reminding us happened back in the period 1989 - 1993.