Moody's Puts Us in a Bad Mood: House Prices Won’t Return to Peak Until 2020

According to this HousingWire.com article, House Prices Won’t Return to Peak Until 2020: Moody’s Analyst, a Moody’s Economy.com report predicts that "at least another decade will pass before housing prices return to peak 2006 levels." For those of you who have been following my blog you already know that I have been saying this for months now. In fact I have been saying that it will be at least 10 years before housing prices return to their 2005-2006 peak levels. The article quotes the Moody's report, written by Moody's Analyst Celia Chen, as stating "The correction will be not only deep but also lengthy. "The national price level will not regain its 2006 high until 2020, a peak-to-peak housing cycle of 14 years."

Despite the 2020 projection being on the low end of my estimate (i.e. AT LEAST 10 years), this HousingWire.com article actually confirms what I have been saying since according to the HousingWire.com article, "the projection seems conservative in light of historic data."  The article states that the Moody's analyst wrote that after the Great Depression, housing prices took nearly 20 years to return to their previous peak. the report also shows that in Japan 15 years passed since their residential market lost half of its value and there are still no signs of a recovery.

The HousingWire.com further quotes the Moody's report as saying "housing prices will regain normalized rates of appreciation during the first five years of the recovery. But the decline in prices and the subsequent recovery vary by region to region. In some states, prices will decline 6% or less and recovery will come before 2014. Other areas that have experienced declines of more than 46% won’t get back to 2006 prices until 2023."

My prediction for Middle Tennessee is that the Middle TN housing market will not recover peak home values until 2023-2025.  This is due to the following characteristics of the Middle Tennessee housing market:

• The Middle TN housing market peaked much later than most areas of the country with a peak of late 2007/early 2008 instead of early to late 2006.
• Extreme overbuilding during that peak especially in the higher price ranges.  This supply balance will continue for many years since for some reason people are still building here.
• Tennessee has historically high rates of personal bankruptcy which will cause higher than average foreclosure and short sale rates.
• Tennessee has higher than average unemployment rates, which will also cause higher than average foreclosure and short sale rates.

Forecast Predicts Nashville Job Market Will Recover in 2012

According to this Nashville Business Journal article, Nashville predicted to recover in 2012, the Nashville metropolitan job market will return to pre-recession job levels in 2012 along with Memphis, Atlanta, Philadelphia, New Orleans, New York City, Boston and 12 other metropolitan areas. According to the article Austin and San Antonio in Texas will recover in 2010 and Dallas-Fort Worth and Houston and 6 other metropolitan areas will recover in 2011.

While all this sounds good, I am reasonably certain that it is not correct if by "pre-recession job levels" they are referring to the 4.5-5.5% unemployment rates that were the norm from 2004-2006. Those unemployment levels would certainly be welcome given that we now live in the era of 10%+ unemployment levels (10.8% for the state of TN in August 2009 according to the Tennessee Commissioner of Labor & Workforce Development James Neeley). Unfortunately, I cannot see how that can happen. The low unemployment rates of 2004-2006 were 70%+/- fueled by consumer spending that enabled businesses to sell products and services and, therefore, hire more employees. That consumer spending was enabled by cheap and easy to obtain debt (think HELOC's, credit cards, auto loans, personal loans, etc.). That debt is now largely gone, or at least significantly reduced.

Therefore, my problem with this article's rosy "pre-recession job levels" prediction is that it does not make sense. How can we return to "pre-recession job levels" if the consumer spending that created that low unemployment no longer exists? The answer is we can't and job levels will not return to "pre-recession job levels" for many, many years. I predict that unemployment rates will drop (i.e. the job market will improve), but the unemployment rates will stabilize at around 6.0-8.0%.

This will all negatively impact housing prices and ensure that foreclosures and short sales remain at relatively high levels for the next several years even after the job market recovers. Simply put, less people will be employed and, as a result, there will be less home buyers.

FHA in Deep Trouble: Default Rates Skyrocketing

According to this Nashville Business Journal article, FHA reserves feeling the squeeze, and this CNBC article, FHA Cash Reserves to Fall Below Required Levels, high levels of FHA loan defaults have pushed FHA cash reserves below the mandated minimum levels.

Both articles state that the head of the FHA said that the agency will not need a tax payer bailout, that the FHA will hire a chief risk officer and that underwriting criteria will be tightened including higher minimum credit scores and stricter appraisal rules. The Nashville Business Journal article quotes the new release statements of FHA Commissioner David H. Stevens as saying "To be clear, the fund's reserves are sufficient to cover our future losses, so the FHA will not require taxpayer assistance or new Congressional action. That said, given the size and scope of the FHA and its importance to today's market, these risk management and credit policy changes are important steps in strengthening the FHA fund, by ensuring that lenders have proper and sufficient protections."

According to the Nashville Business Journal article, the FHA has become an increasing source of mortgages for first time homebuyers. The problem is that the article also quotes a statistic from the Mortgage Brokers Association, which shows that about 1 in 6 FHA borrowers were behind on their mortgage payments (i.e. in default). That is a 16.67% mortgage default rate.  In other words it is TERRIBLE!  This will ultimately lead to lots of FHA foreclosures and short sales.

While I would like to believe the FHA's statements about not needing a bailout, I cannot. Mark my words, the FHA will indeed need a bailout. You just cannot lend people 96.5% of the purchase price of their home in a declining market and not expect large numbers of foreclosures. Even if the market was flat the FHA buyers would have negative equity due to the cost of selling a home exceeding their down payment.

Due to the Middle Tennessee housing market having relatively lower housing prices and incomes than other areas of the country, there are a lot of FHA home purchases. As a result expect a lot of FHA foreclosures and short sales in Middle Tennessee.

What the Government Should Do to Help the Housing Market: Stop Meddling in Housing and FIX THE ECONOMY

How should the government fix the housing market? The answer, stop meddling in the housing market. Instead, the government should focus on the economy. The fundamental question is why have jobs been leaving the US for the last 3 decades? Answer: taxes, government regulations (think environmental regulations that punish companies while doing nothing to help the economy such as CO2 emissions, etc., hiring quotas, employment laws, etc.) and labor unions. Fix those problems and employment and income rises. After several years maybe incomes will catch up enough and housing prices will fall enough that we actually reach a sustainable ratio of median home prices to median incomes (normally median home prices in an area are 3x incomes in that area) when overall employment is stable.

Right now we have increasing unemployment, increasing foreclosures and short sales, but artificial government meddling. This is causing confusion and chaos. For those who think we can ride this out with a 1 year extension of the tax credit, etc., please look at the stats. Foreclosures will remain at very high levels for 3-5 years and at high levels for several years beyond that. Unemployment, will start to go down in about 12-18 months, but it will not go back down to the 4.5%-5.5% levels of 2004-2005 because the economy (and the employment market) was so dependent on consumer spending and that spending will not come back since it was fueled and enabled by easily obtainable debt that is no longer available.

While this mess hurts me right now as a REALTOR and a homeowner who is trying to sell their home due a relocation, I know this is true. Declining housing prices are good for the economy. It will free up homeowners' capital that can be spent and/or invested in other areas instead of being sucked up by artificially high housing payments. It will enable people to actually eventually own their own homes and live with less debt and stress instead of living on the absolute edge. It is better to pay less for a home with higher interest rates then to pay more (and borrow more) at lower rates. This is all just a deleveraging of the US economy, which IS NECESSARY.

Mark my words, eventually the government subsidizing of the real estate market will end and the housing market will decline more. It is unavoidable.

My Thoughts on the "Doomed" Housing Market: Listen When "Dr. Doom" Speaks

According to this CNBC article, US Economy Facing 'Death by a Thousand Cuts': Roubini, Nouriel Roubini says "more banks will fail and residential real estate prices have more room to decline."  According to Roubini, the economy faces a real threat of a "double dip" recession due to the severely damaged financial system and a lack of consumer spending.  Roubini says "the securitization market is all but dead, the credit markets are still frozen and consumers will continue to save more rather than spend and boost growth."  He predicts that by the time this financial and economic crisis is all over the following will happen:

• More than 1,000 financial institutions could fail.
• Housing prices will likely to fall another 12 percent in the next year making the total decline approximately 40 percent since the market began its steep decline. This will result in nearly one half of all homeowners owing more on their mortgages than their houses are worth.

Regarding housing construction, Roubini states "The gap between supply and demand is so huge we could stop producing new homes for a year to get rid of all the inventory  This price adjustment, in my opinion, is going to continue for another year."

Regarding commercial real estate, he warns that regulators are repeating some of the same mistakes made during the financial crisis. He states "Allowing forbearance in the deeply troubled sector will mask underlying problems that will come back and bite the economy".

While I do have a BA degree with a major in Economics from an Ivy League University, I am not a professor or professional economist.  However, I have been saying much of the same for months now.  That is that housing prices are still too high and there is still too much new construction.  We do not need new construction reduced to such and such levels - we need all new spec construction to come to a halt for at least a year.  Of course, that will not happen.  Instead new homes will be built, housing will continue to decline, more short sales and foreclosures will occur and more bailouts will be doled out to foolish banks and lenders.  It's an endless cycle of disaster.

With respect to the Middle Tennessee real estate market:

• Rutherford County Tennessee: Murfreesboro TN, Smyrna TN and La Vergne TN (LaVergne TN)
• Williamson County Tennessee: Brentwood TN and Franklin TN
• Davidson County Tennessee: Nashville TN and Belle Meade TN

I have been saying since I moved here in September 2008 that the Middle Tennessee housing and commercial real estate market is significantly over built and that housing prices are still too high.  Since the peak of the real estate market in Middle Tennessee occurred in late 2007/early 2008 (i.e. 2 years later than most places) the market here will decline for a few more years.  Also, a large portion of the homes sold with 95-100% subprime and FHA financing which have high default rates so short sales and foreclosures will be high in Middle Tennessee.  Therefore, I predict that the Middle Tennessee real estate market will do worse than the US average over the next few years.