Friday, July 3, 2009

Affordability is Key

The U.S. economy has entered a recession and will contract for the next three quarters. The recovery, beginning in the second half of 2009, will be slow.

Despite these challenging economic times, existing home sales will be rising. Why? The answer, in a word: affordability.

With home prices falling in many parts of the country affordability conditions have markedly improved. Even with rising unemployment, nearly 93 percent of households will have jobs. These 93 percent of the working households respond to home buying incentives. Measures such as the recently enacted first-time homebuyer tax credit and a larger number of mortgage loans that qualify for purchase by Fannie Mae and Freddie Mac and through the FHA program will further bring homebuyers to the marketplace.

New home sales will be a different story. There is an overhang of inventory and homebuilders are being forced to cut back sharply. New housing starts have fallen by about 60 percent from their peak activity three years ago. That isn’t necessarily all bad news – since so few new homes are being built, the inventory of vacant new homes on the market has fallen. The total housing inventory – new and existing combined – still remains elevated so further reduction in building by builders will be welcomed. Because of low housing starts, new home sales will continue to be soft.

For the rest of the “indicators” we look at, yes, there will be some pain before we have gain. Look for growth in the U.S. gross domestic product (GDP) to contract for two consecutive quarters, in the fourth quarter of this year and the first quarter of 2009, before expanding in the latter part of 2009 as the housing market begins a steady improvement.

Affordability Will Continue to Improve

The best news out of our forecast is that affordability will continue to improve. NAR’s housing affordability index is expected to average 18 percentage points higher this year than in 2007. That is good news for potential home buyers and good news for the economy. And even though sales are expected to rise, the increase would be more certain – and more robust -- with an additional stimulus to boost home buying. Removing the repayment feature of the homebuyer tax credit and raising the loan limit higher could help achieve that. Once housing gets moving, then the economy can get moving as well.