Housing markets from Punta Gorda, Fla., to Stockton, Calif., will crash, and some will suffer price drops of more than 30% before the housing crisis is over, a report from Moody's Economy.com said today.
On a national level, the housing market recession will continue through early 2009, said the report, co-authored by Mark Zandi, chief economist of Moody's Economy.com, and Celia Chen, director of housing economics.
The report paints a worsening picture of the hard-hit housing sector, which is in the midst of its worst downturn since World War II.
While activity will stabilize in 2009, it will be 2010 before a measurable improvement in sales, construction and pricing will emerge, the report said.
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Overall, house prices are forecast to fall 13% from their peak through early 2009. After accounting for incentives home sellers are offering buyers, effective declines from peak to trough will total well over 15%, according to the report, which said the housing recession will ultimately be severe enough to be characterized as a housing crash.
Punta Gorda and Stockton are the hardest hit markets in the United States, with price declines from peak to trough forecast at 35.3% and 31.6%, respectively.
"This is the most severe housing recession since the post-World War II period," Zandi told Reuters.
These markets have been hard hit due to several reasons, namely the exiting of investors from the areas, a fair amount of subprime mortgage loans causing an increase in foreclosures and overbuilding by home builders, Zandi said.
Taking an economic tollHome sales, however, should hit a bottom in early 2008, which will mark a 40% drop from peak to trough.
"The housing market's most fundamental problem is it is awash in unsold inventory," the report said.
In addition, the housing downturn will take a large toll on the rest of the economy. During the height of the boom in 2004-05, housing contributed nearly a percentage point to annual real gross domestic product, or GDP, growth.
In the downturn, housing will subtract more than 1 percentage point from U.S. economic growth this year and 1.5 points in 2008, with the effect on growth seen most pronounced next spring and early summer.
"The intensifying housing recession is expected to weigh on the broader economy, but not break it," the report said.The Moody's Economy.com's report, titled "Aftershock: Housing in the Wake of the Mortgage Meltdown," said that when house prices hit their nadir, some 80 of the nation's 381 metropolitan areas will experience double-digit peak-to-trough price declines.
Price declines, however, will vary in degree throughout the nation. Around Detroit and Washington, D.C., for instance, a peak-to-trough decline of more than 15% is expected, according to the report.
Significant declines are also expected throughout most of Arizona, California, Florida and Nevada. During the housing market's heyday, speculative activity was rampant in these areas, causing prices to surge much higher than other regions.
Declines of between 5% and 15% are expected for the Northeast corridor as well as such markets as Denver, Salt Lake City and Boise, Idaho. In the rest of the industrial Midwest and parts of the Mountain and Pacific Northwest, prices will fall more modestly.
Though some point to rising default rates in the subprime mortgage market, which caters to borrowers with poor credit histories, as the root cause of the problems plaguing the housing market, Moody's Economy.com said an unwieldy supply of unsold homes is the prime factor.
The U.S. Census Bureau said that, as of the third quarter of 2007, there were close to 2.1 million vacant unsold homes for sale, equal to 2.6% of the stock of owner-occupied homes.
A well-functioning housing market has a substantial amount of inventory, but in the quarter-century between the early 1980s and mid-2000s, the vacancy rate stayed near 1.7%.
The difference between the two vacancy rates provides a good estimate of the amount of excess inventory in the market, which currently totals nearly 750,000 homes and is by far the highest level of excess inventory in the post-World War II period, Moody's Economy.com said.
Moody's Economy.com is an independent subsidiary of Moody's and provides economic research and consulting services to businesses, governments and other institutions.
This article was reported and written by Julie Haviv for Reuters.