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Monday, May 16, 2011

Housing Market Blues and Small Business

The recent news on housing prices has wiped out any hope that the housing market has emerged from its depression.

And while some are saying that housing is experiencing a double-dip, let's be clear: This has been one long housing depression since the start of 2006.

Consider, for example, GDP's real private domestic residential investment measure. Over the past five-plus years, real residential investment declined in 18 of 21 quarters. In 15 of those quarters, the annualized rate of decline was in double-digits - reaching as high as -36%.

If that's not a depression in housing, I don't know what is.

But there was some hope that a bottom was being hit. In two of the last four quarters, residential investment actually was positive. But as has been reported widely, various measures continue to weigh down the housing market.

• On May 5, Clear Capital released its monthly Housing Data Index Market Report with data through April. Among its findings were that national quarterly home prices fell by 4.9%; prices over the previous nine months were down by 11.5%, "a rate of decline not experienced since 2008"; and "all the major Metropolitan Statistical Areas (MSA) tracked in this month's report showed quarter- over-quarter price declines."

• The latest survey out on May 9 found: "Home values fell three percent in the first quarter of this year, marking a pace of decline not seen since 2008 when the housing recession was at its worst. Home values fell one percent between February and March and 8.2 percent from March 2010. The cumulative decline in home values since the market peak is now 29.5 percent."

• The number of distressed homes hitting the market have taken a toll. In his May 2011 Economic Outlook, Frank Nothaft, chief economist for Freddie Mac, summed up: "A relatively large supply of distressed properties entered the market during last winter, a period when homebuyer demand is seasonally weak, and has caused further erosion in national indexes. The National Association of Realtors® reported that 40 percent of home sales in March were distressed sales, the largest monthly share since April 2009. Freddie Mac's House Price Index for the U.S. declined 2.8 percent between December 2010 and March 2011, in part reflecting the large volume of distressed transactions in the housing market." also noted: "Foreclosure re-sales reached a new peak in March 2011, representing 23.7 percent of all sales during the month compared to 17 percent in March 2010. Foreclosure re-sales have been increasing steadily since June, when they made up 14 percent of all sales."

• The housing market received some temporary, artificial support from a federal tax credit for first-time homebuyers. That expired in mid-2010. The Wall Street Journal (May 9) reported: "Sales collapsed when the credits expired last summer, and prices in many markets have been falling ever since. While most economists expected sales to decline after tax credits expired, the drag on the market has been greater than many anticipated."

Clear Capital warned: "Markets have entered uncharted territory, however, as this current home buying season will be the first since 2008 without any tax credit incentive. A note of caution to those looking for a strong end to 2011: The last time no incentives were in place and distressed inventories were this high, home prices fell sharply."

• But what about the impact of lower prices making homes more affordable, along with low mortgage rates? The Freddie Mac chief economist report noted, for example: "Homebuyer affordability remains extraordinarily high because of low mortgage rates and house prices that are well off their cyclic peak: The average rate on 30-year fixed-rate conforming mortgages has hovered between 4.75 and 5.00 percent for most of this year, according to Freddie Mac's Primary Mortgage Market Survey®."

Other forces, though, clearly are pushing against these affordability factors.

One is the tightness of credit. The Journal reported: "However, credit standards remain tight, posing another challenge for the housing market. Just as many unqualified borrowers received loans during the boom, ‘there are people today who probably could afford loans but can't get them,' says David Berson, chief economist at PMI Group Inc."

And there's the issue of the overall economy, and its lack of job creation. Indeed, this is the big issue when it comes to the housing market.

Both and Freddie Mac's chief economist highlighted the role of unemployment in their expectations for housing looking ahead. captures grim expectations that seem to be widespread: "Because of the strong depreciation in the first quarter, we've revised our forecast for the total home value decline nationally in 2011 to 7-9 percent (previously 5-7 percent) and our forecast of the bottom from late 2011 to 2012 at the earliest. As always, our expectation post-bottom (where we define the bottom as the end of consistent monthly depreciation) is for a long period of below-normal real estate appreciation during which time we work out the remaining overhang of excess housing supply. Housing demand remains fundamentally weak but will see some improvement in the balance of this year due to slowly improving employment conditions and increasing rates of household formation. We believe, however, that this somewhat improving picture on the demand side will be largely offset by excess supply. The supply picture continues to look bad with approximately two million homes in the foreclosure process and another more than 1.5 million homes seriously delinquent. While delinquencies do appear to be declining recently, we believe that rates will remain much higher than normal for a considerable period of time due to high negative equity rates and elevated unemployment."

And unemployment was echoed in the assessment from Freddie Mac's chief economist: "Unemployment/income curtailment has been the single most important hardship reason that triggered delinquency on conventional loans made to prime-credit borrowers during the economic downturn. Indeed, the U.S. Treasury has reported this to be the most important trigger event leading to default for borrowers that subsequently received permanent loan modifications through its Making Home Affordable program. Future declines in the unemployment rate will certainly be good news and will help to push serious delinquency rates lower. Nonetheless, the extended period of relatively high unemployment rates will likely translate into a similar projected path for serious delinquency rates on mortgages: These rates will likely trend lower in the mortgage industry during 2011, but continue to remain at extraordinarily high levels for an extended period."

The continuing housing depression has various implications for small business.

First, given the importance of home-equity financing for start-ups and very small businesses, both the decline in home values and the tough credit market translate into a very real and significant contraction in credit availability for small businesses.

Second, residential housing plays a significant role in the overall economic well-being of the nation. For example, from the end of the 2001 recession through mid-2005, residential investment contributed significantly to the nation's real GDP growth. In turn, the housing depression has served as a significant economic negative over the past five-plus years. That has been felt, of course, throughout the small business community.

Third, it is important to understand that the housing market is dominated by small businesses. Consider, for example, that in the residential building construction industry, 99.9% of firms have fewer than 500 employees, and 96.9% have less than 20 workers. This housing depression has been a depression for small firms.

A housing recovery does not need more artificial government support, like costly bailouts and temporary tax credits. Instead, it needs a turnaround in the overall economy, i.e., robust growth that will lead to expanding jobs and rising incomes. That, of course, requires a very different set of policies than have been imposed over these few years. The shift needs to go from more regulation to less regulation (including reversing counterproductive financial regulations that have helped limit credit); from ever-expanding government spending to reductions in the size of government; from the reality and threats of higher taxes to substantive, permanent tax relief; and from the Fed risking high inflation (and increased borrowing costs) to monetary policy focused on price stability.


Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council.

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