How long will housing slump last?

By Christian Science Monitor

First came a slowdown in the volume of home sales. Now prices are falling, and the questions for anyone selling, buying or even just hanging onto a home are: How far and how fast?

The expert consensus: The slump could last into summer 2007. And the speed could depend on how many people hit the panic button or take their homes off the market.

Last month, the median price of a single-family home was down from a year ago -- the first significant national decline in 13 years, according to tracking of previously owned homes by the National Association of Realtors. The median price for all housing types was $225,000, down 1.7% from August 2005, when the median was $229,000, the Realtors group reported Monday.

Historically, it's rare for prices to sink far nationally even when recessions occur. The Realtors association predicts a return to stability next year. But some economists are forecasting a tougher climate, thanks to an extraordinarily large run-up in prices in the past couple of years and homebuyers' increasing reliance on exotic new types of mortgage loans. Merrill Lynch predicts a 5% home-price drop in 2007, while Goldman Sachs, another New York investment firm, forecasts a 3% decline nationwide.

"The housing market is weak and getting weaker," says Mark Zandi, the chief economist for Moody's Economy.com. "It appears the downturn has a ways to go."

How will it unfold?

After a five-year boom in the housing market, the direction that home prices take from here could have significant impacts on the direction of the economy and on the pocketbook finances of millions of families. But economists differ in their forecasts of how the real-estate cycle will unfold.

The Realtors association has taken a largely upbeat view. "This is the price correction we've been expecting -- with sales stabilizing, we should go back to positive price growth early next year," association economist David Lereah says in a statement accompanying Monday's numbers.

The volume of sales barely budged in August, closing the month at an annualized pace of 6.3 million existing-home sales, according to the report. That suggests some possible stabilizing after months of declines in the number of units sold. Home-sellers may finally be settling for lower prices rather than letting their homes sit on the market.

Pessimists say a speculative "bubble" had built up and now needs to unwind, possibly over several years.

"As Draconian as that sounds, a 5% price decline would only reverse one-tenth of the price run-up over the previous five years," Merrill Lynch economist David Rosenberg says in a recent report.

"Additional price declines should not be surprising," says Asha Bangalore, an economist at Northern Trust in Chicago. "We have a recession in the housing market. ... Usually, it takes two to three years to stabilize."

She points to a rising supply of homes on the market. There are now enough homes on the market to meet demand for 7.5 months, up from 7.3 months supply in July, Bangalore says. The last time inventories surpassed current levels was in October 1992, during the last housing downturn.

Over by the end of 2007?

Economist Richard DeKaser of National City in Cleveland says the decline in sales volume is only about half-done. So far, he reasons, existing-home sales have fallen about 12.6% on a year-over-year basis. "On average, they have fallen on the order of 25%," he says. "This suggests we're about halfway there, and by late next year, this should be over."

Though the housing numbers are bad, the rate of decline may be slowing. "The fact is that the decline is showing signs of losing momentum, not gaining momentum," says Bob Brusca of FAO Economics in New York. For example, the decline in the August sales volume was less than economists had expected, he says. "We can't say it's a turning point, but we can say it's an inflection point."

Brusca expects the downturn to continue for another year but at a slower pace. He's not concerned about the drop in home prices because during the past three years, the median price of houses has risen 27%, and the average price of a home has gone up 20.9%.

"Even though prices have fallen, people still have a lot of wealth and equity built up," Brusca says. "We would need to see a lot more decline before it materially impacts consumer finances."

The ARM factor

One new uncertainty in this cycle is today's greater reliance on adjustable-rate mortgages. With the interest rates on those loans shifting up, a key question is how many owners will have to unload homes they bought during good times when values were rising and interest rates were low.

"The probability of a more disorderly correction is raised by this element," Northern Trust's Bangalore says.

The decline in last month's prices of new homes on a seasonally adjusted, year-over-year basis is the first such drop since February 1993, except for a slight blip on a seasonally unadjusted basis in April 1995.

Prices may continue to fall because many of the leading economic indicators have continued to weaken.

The home builders' sentiment index is continuing to decline, as are the number of pending sales of existing homes. Applications for mortgages also remain soft. And the inventory of unsold homes continues to rise, now up to 3.9 million homes, about double what it was in 2003 during the height of the housing boom.

"The rising number of unsold homes reflects the home sellers who were hoping to cash out at a high price and have kept their homes on the market for an extended time," says Zandi, of Economy.com.

Some of these trends are likely to continue until next summer, says Zandi, when he expects to see housing begin to stabilize. With such a long period of weakness, he says, it's beginning to look as if home prices might fall in 2007 by about 5% on a year-over-year basis.

"This would be the first calendar-year decline since the Great Depression," Zandi adds.

By Mark Trumbull and Ron Scherer