Betting Who's Right on Housing: Baker-Whitney vs Maki-Harris
Dean Maki, chief U.S. economist at Barclays Capital, says the worst is over for the U.S. housing sector. Dean Baker, co-director of the Center for Economic and Policy Research, expects another painful decline.
They reflect an almost even split among forecasters on the outlook for residential real estate, and whichever side turns out to be right will have made a call on more than just home prices. Housing will play a crucial role in the direction of the nation’s economy and global financial markets, just as it triggered a two-year recession that erased more than 8 million U.S. jobs and $37 trillion from world stock markets.
“There is real destruction when housing demand declines because to most American families a home is their most important asset -- a very significant part of their wealth and retirement savings,” Joseph Stiglitz, an economics professor at Columbia University in New York and a Nobel Prize winner, said in a telephone interview. “When they feel insecure about its value there obviously is a very big impact on their quality of life.”
Two reports this week showed that home sales reversed course in May after getting a bump higher from government stimulus programs including a buyer tax credit. New-home sales fell 33 percent to a record low annual pace of 300,000, the Commerce Department said yesterday. Purchases of previously owned homes unexpectedly dropped 2.2 percent, the National Association of Realtors said June 22.
Case for Bears
The May home-sales declines lend at least temporary credence to housing bears like Baker, a University of Michigan Ph.D and author of “False Profits: Recovering From the Bubble Economy” (PolipointPress, 2010). Baker, who is based in Washington, estimates that home prices will fall 12 percent this year, wiping out a 9.1 percent gain in the median price over the past three months, as gauged by the National Association of Realtors.
Meredith Whitney, founder of Meredith Whitney Advisory Group in New York, told CNBC this week that another housing recession is likely.
“We think the consumer is going to have a tough time in the second half,” she said in a June 22 interview with Bloomberg News. “We think the second quarter is going to be very tough for other players in the capital markets and we remain cautious on the banks at large.”
Also in the bears’ camp: Joshua Shapiro, chief U.S. economist for MFR Inc. in New York, who is calling for a 10 percent decline in prices; and Nariman Behravesh, chief economist of IHS Global Insight in Lexington, Massachusetts, who expects a loss of 7 percent.
Range of Estimates
Barclays’s Maki, ranked the most-accurate forecaster of gross domestic product in a Bloomberg News survey in December, estimates a 0.2 percent increase in home values this year. Maury Harris, chief economist of UBS Securities in New York, says there will be no change and Joseph LaVorgna, chief U.S. economist at Deutsche Bank Securities in New York, predicts a gain of 2.5 percent.
“It’s not unusual to have disagreement about the outlook,” Maki said in an interview. “Often these views come down to how one views the broader recovery.”
About half of 106 U.S. forecasters in a study published yesterday by MacroMarkets LLC expect price declines in 2010 and half anticipate either little-changed or increasing values. The estimates in the study range from Baker’s 12 percent drop to the 3.4 percent gain forecast by Bill Watkins, executive director of the Center for Economic Research and Forecasting at California Lutheran University in Thousand Oaks, California.
“To some extent economists are engaging in crystal-ball gazing, but it’s important to put down markers,” said Terry Loebs, managing director of MacroMarkets, a Madison, New Jersey- based company that creates securities that allow investors bet on housing. “The width of that spread is a byproduct of uncertainty in the market.”
Stock and bond markets began to slide and the economy tumbled into recession at the end of 2007 amid mounting defaults on subprime mortgages. Banks, brokers and insurers worldwide reported $1.8 trillion in losses and cut almost 350,000 jobs, according to data compiled by Bloomberg. The U.S. government pumped $460 billion into financial firms to prevent a collapse of the banking system.
The median U.S. home price slid 29 percent to an almost eight-year low of $164,600 in February from a peak of $230,300 in July 2006, according to data from the National Association of Realtors in Chicago. More than a fifth of U.S. mortgage holders owed more than their homes were worth in the first quarter, Seattle-based Zillow.com said last month.
Fed Holds Steady
Lower real estate prices increase foreclosures and deflate the profits of banks burdened with seized properties. Federal Reserve policy makers yesterday held the benchmark interest rate in a range of zero to 0.25 percent, saying in a statement that lower home values are impeding consumer spending that accounts for 70 percent of the U.S. economy.
“Household spending is increasing but remains constrained by high unemployment, modest income growth, lower housing wealth and tight credit,” the policy makers said in the statement. “The pace of economic recovery is likely to be moderate for a time.”
Mortgage defaults will push prices lower by adding to the inventory of homes for sale, MFR’s Shapiro said. A record 4.6 percent of U.S. home loans were in foreclosure in the first quarter, according to a report last month by the Mortgage Bankers Association in Washington. The combined share of foreclosures and mortgage delinquencies was 14 percent, or about one in every seven U.S. mortgages.
‘Enormous Looming Overhang’
“We think prices have to come down further because you have an enormous looming overhang of supply,” Shapiro said in an interview. “You can’t say things have bottomed.”
The government began phasing out housing stimulus programs in March, when the Federal Reserve ended its purchases of $1.25 trillion of mortgage-backed securities. The buying kept the average U.S. 30-year fixed-mortgage rate in the range of 4.93 percent to 5.14 percent in the first three months of the year. The rate fell this week to a record low of 4.69 percent, Freddie Mac, a mortgage-finance company in McLean, Virginia, said today.
The tax credit of as much as $8,000 required buyers to have a signed contract by April 30 and close on a property by July 1.
“One reason the estimates on prices are so wide is that no one is sure what impact government intervention in the marketplace will have,” said MacroMarkets’ Loebs. “We haven’t seen a market like this before.”
Another cause for the debate on the future of the housing sector is economists’ varying forecasts on how fast the economy will recover the jobs lost since the recession began in December 2007, the worst employment slump since World War II.
While the economy has expanded payrolls for five consecutive months this year, the unemployment rate will take time to drop. The jobless rate will average more than 9 percent into next year, according to a Bloomberg News survey of economists taken from June 2 to June 8. It reached a 26-year high of 10.1 percent in October.
The U.S. economy probably will expand 3.2 percent this year, following a 2.4 percent loss in 2009, according to the median estimate of 67 economists in a Bloomberg poll. Growth probably will dip to 3 percent in the third quarter from 3.3 percent in the three months ending June 30, according to the survey.
“Housing is contributing absolutely zilch to economic growth,” said William Wheaton, an economics professor at the Massachusetts Institute of Technology in Cambridge, Massachusetts. “It’s not that people want houses to be expensive. They want the housing sector to start pulling up the economy as it has done after past recessions, and that’s not going to happen until prices rise.”
When that price gain happens, it will have to be substantial to make up for losses in home values, said Columbia’s Stiglitz.
“Even a 3 to 4 percent increase in value won’t help people who have seen their homes decline 20, or 30 or 50 percent,” Stiglitz said.