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YOU DECIDE: Is there hope for housing?

March 06, 2009

MEDIA CONTACT: Dr. Mike Walden, 919.515.4671 or michael_walden@ncsu.edu


Dr. Mike Walden
Media representatives:For a black-and-white or color copy of this photo, call 919.513.3127 or e-mail dave_caldwell@ncsu.edu.

It's well known by now that the current recession began in the residential housing market.

An unprecedented boom in housing construction and sales earlier this decade carried the price appreciation rates for homes to previously unseen, lofty levels. For example, over that time period, home prices typically rose 2-to-4 percent per year. By mid-decade, these rates had spiked at 12 percent, by some measures.

Then these growth rates came crashing down.

For most of the past two years, average home prices across the country have dropped by as much as 18 percent annually, according to one indicator. In some markets the plunge has been much more; in others, like North Carolina, it has been much less. Indeed, some indicators show housing prices still rising in our state.

But it really doesn't matter where you live, because the reversal in the housing market has affected us all. The inability of many families to sell their home in one state has prevented them from moving to another state. And because North Carolina has been a leader in attracting households and families from other regions, the slowdown in interstate migration has curtailed our economic growth rate.

Also, North Carolina, like every other state, is tied to the national financial system. So if banks are more reluctant to lend because of the increased risks associated with the recession, then borrowers in North Carolina also will feel the effects of this.

Experts agree a big key for general economic recovery is a turnaround in the residential housing market. Simply put, more people must buy homes, the inventory of unsold homes must drop and housing prices must first stabilize and then head up. The fate of the entire economy is now counting on these trends happening.

Is there any hope they will? Is there any hope for a housing recovery and with it a broader economic recovery? Many economists now think so, and for several reasons.

A big one is based on fundamental economics. The problem in the housing market has been too much supply (homes for sale) relative to demand (people buying homes). This situation is prompting the price drops and causing homebuilders to sit on the sidelines.

The bad news is that the gap between sellers and buyers still exists. The good news is the gap is narrowing.

Although home sales are still trending downward, the relative declines are getting smaller. For example, recently existing sales as a percent of previous year's sales have been around 90 percent; a year ago they were near 75 percent. Builders are also constructing new homes at the slowest pace in decades. Consequently, the excess supply of unsold homes has fallen by 15 percent in recent months.

Homes are also becoming more affordable, especially compared to renting. The cost of owning a home relative to the cost of renting has fallen 25 percent in the last two years and is now at the 20-year average. Indeed, some analyses now show homes in selected areas selling for less than their market values. Combine this with the new $8,000 federal tax credit for new homebuyers and you have a powerful incentive for purchasing a house.

Therefore, there are reasons to be cautiously optimistic about the residential housing market. A just-released study from a major national company engaged in economic analysis now says the housing market will begin to make a positive turn at the end of the year.

Yet let me caution you on what this does and doesn't mean. It doesn't mean that by year's end everything will be fine in the housing market. It won't be. Foreclosures will still be occurring, builders will still be suffering, and homes will still be selling at a slow pace.

Instead, what the prediction of a housing turnaround means is that the market won't be getting worse. The plunge will have stopped and the beginning of a long climb up will have started. Sales will be inching higher, prices will have bottomed out and contractors will slowly begin to construct new homes.

But it may very well take years for the housing market to get back to some level of "normal." And even then, normal won't be the fast pace of construction and buying that we saw between 2003 and 2007. The new normal will be something much less.

However, it will be a start. And as they say, everything has to start somewhere.

You decide if this start is enough for optimism.

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Dr. Mike Walden is a William Neal Reynolds Professor and North Carolina Cooperative Extension economist in the Department of Agricultural and Resource Economics of N.C. State University's College of Agriculture and Life Sciences. He teaches and writes on personal finance, economic outlook and public policy. The Department of Communication Services provides his You Decide column every two weeks. Earlier You Decide columns are at http://www.cals.ncsu.edu/agcomm/writing/walden/decide.htm

Related audio files are at http://www.ncsu.edu/waldenradio/

Posted by Dave at March 6, 2009 09:19 AM