WASHINGTON — The current housing slump, which began in late 2005, probably has another year to go before things turn around. Before it is over, home prices — which had soared during the boom years — will probably have fallen by the largest amount of any downturn in the post World War II period.
The problems in housing have been a serious drag on the overall economy — slashing more than a full percentage point off growth in some quarters. And those adverse effects will get worse in coming months, many private economists believe, reflecting the fallout from the severe credit crunch that hit in August.
The betting is that the overall economy will be able to avoid a recession, but it will be a close call with the point of maximum danger still ahead.
“I think the housing market has got another year of very weak sales, falling construction and lower home prices. And all of that assumes that the economy holds together reasonably well and we don’t have a recession,” said Mark Zandi, chief economist at Moody’s Economy.com.
The biggest worry is that mortgage financing problems will grow even more severe, with soaring defaults dumping more homes onto an already glutted market, driving prices down further.
In a new report, the Joint Economic Committee estimates there will be 1.3 million foreclosures from mid-2007 through 2009 in subprime mortgages, loans provided to borrowers with weak credit histories.
Those foreclosures will wipe out an estimated $71 billion in housing wealth directly and $32 billion more indirectly by lowering the values of neighboring homes, according to the report by the JEC’s Democratic staff. The report predicts that will end up costing states $917 million in lost property tax revenue through 2009. California, New York, New Jersey and Florida are expected to be among the biggest losers.
“We are looking at a tsunami of subprime foreclosures that has been hitting subprime borrowers hard and is on track to hit prime borrowers and the economy as well by lowering property values and reducing local tax revenues,” said Sen. Charles Schumer, D-N.Y., who has been lobbying the Bush administration to provide more assistance to help homeowners avoid defaulting on their mortgages.
JEC economists caution that their forecast is heavily dependent on how much home prices decline during the slump. If the downturn turns out to be worse, it will mean even bigger price declines, more foreclosures and more dollar losses in both home values and property taxes.
Home prices have declined close to 4 percent from their peak set in early 2006, according to the Standard & Poor’s/Case-Schiller index. David Wyss, chief economist at Standard & Poor’s, believes that before the downturn is over, home prices will fall by 11 percent, according to this gauge.
That would far surpass a 6.5 percent drop in prices, according to the Case-Schiller measurement that occurred in 1990-91, the only other time it has shown falling prices.
Other economists using different price measurements are also forecasting declines. The National Association of Realtors is predicting the median price of an existing home — the point where half sell for more and half for less — will fall by 1.5 percent this year, the first price decline on an annual basis on the group’s records going back four decades.
Before the slump ends, Zandi said, he believes median existing home prices using the Realtors’ measurement will fall 10.4 percent, making this the biggest downturn in terms of prices since the Great Depression of the 1930s, when home prices dropped by about one-third.
Economists stress that the price weakness must be viewed in the context of an unprecedented run-up in prices that occurred during a five-year boom in home sales, a period that some economists believe reflected a speculative bubble that pushed prices well past affordability levels in many parts of the country.