KEY POINTS:
Ivy Zelman's view of the US housing market is gloomy, but it's probably the most realistic.
A veteran Wall Street analyst, Zelman, chief executive of the research firm Zelman & Associates, says it's unlikely the US housing market will recover before 2009, adding there's a "50 to 60
per cent chance of a recession," as the housing slump curbs consumer spending.
Zelman paints a much darker picture than Federal Reserve Chairman Ben Bernanke, who said last week that housing will be a "significant drag" on the economy into next year.
When you consider the huge home inventories and tight-as-a-drum mortgage restrictions, it's easy to conclude that the housing slump could extend well past 2008. Unless financing loosens up and buyers return, her prophecy will become a reality.
"I've never seen the market as bad as this," Zelman said. "And it could get worse. The home-price decline could range from 16 per cent to 22 per cent."
Monitoring inventory, builder incentives and demand, Zelman is also watching adjustable-rate mortgage resets. Homeowners with these loans will automatically face higher monthly payments that they may not be able to afford, another trigger for foreclosures or sales. Some US$500 billion ($666 billion) of these loans will re-adjust through 2008, Zelman says.
While foreclosures have declined somewhat from August to September, they still doubled from a year ago, according to RealtyTrac, which monitors the housing market. Since more homes are coming on to the market, Zelman says that will only add to the misery.
"These are the worst inventories we've seen as a nation," she says. Zelman originally presented her report to the Home Improvement Research Institute, a Tampa, Florida-based trade group.
Zelman's words carry weight as she was one of the few major Wall Street analysts to warn of a housing decline months before it began late last year.
She was alarmed that home prices far outpaced personal income increases during the boom, which is how the economic disconnect began. A bubble created artificially high demand that had to deflate sometime. Now economists and analysts are trying to assess the collateral damage of the bust and subprime mortgage meltdown.
Meanwhile, builders are stuck with thousands of new homes they can't sell and potential buyers are cancelling in droves or are unable to get a mortgage. Housing starts fell to a 14-year low in September.
"Builders are desperate now and blowing through inventory," says Zelman of homebuilders who are doing anything they can to sell homes. "Their revenues are shrinking so fast, they can't keep up."
The mass psychology that amplifies and spreads the angst of home sellers will put a brake on overall consumer spending, Zelman predicts.
"Some 74 per cent of consumer expenditures are correlated to housing. I don't think the consumer will hold up. They will cut back on things like buying cars and vacations."
While Zelman forecasts that sales will drop for the next two years, she isn't as optimistic on home prices, which she says may continue falling until 2010 or 2011.
"We'd be better off if prices corrected all at once. It will get worse before it gets better."
Places where sales were strongest and speculators were most active before the bust will be bedevilled by high home inventories for more than a year.
Cities that scored lowest with an "F minus" grade, described as "very competitive with a negative bias" in her firm's September homebuilding survey, included San Diego, Phoenix, Inland Empire (California), and Fort Myers, Florida. Those rated "moderate and stable" - a "C" in their rankings - were Philadelphia; Raleigh, North Carolina; and San Antonio.
Areas connected to auto-related job cuts in Michigan and Ohio will continue to feel pain.
Not every market will get pummelled, though. Manhattan seems to be holding up for certain kinds of housing. Prices of co-op apartments with four bedrooms or more, for example, rose 19 per cent in the third quarter from a year earlier.
Major markets with the lowest level of housing distress include Bethesda, Maryland; Boston-Cambridge, Massachusetts; and Manchester and Rockingham, New Hampshire. That's according to HomeSmartReports, a service that tracks six variables of home-market risk.
Keep in mind that job growth and consumer spending bear close scrutiny. If Zelman is right about a recession, then prices may fall more, plunging the housing market into an even sorrier state.
Bloomberg