The nation is in the throes of a housing downturn that researchers at Harvard University’s Joint Center for Housing Studies said Monday morning was “shaping up to be the worst in a generation.” While the falloff in housing starts, new home sales, and existing home sales already rivals the worst downturns in the post World War II era, the study found that home price declines and mortgage defaults are the worst on records that date back to the 1960s and 1970s. “The slump in housing markets has not yet run its full course,” said Nicolas Retsinas, the director of the Joint Center for Housing Studies, echoing what has alreadly become prevailing sentiment among most economists. “Mortgage rates have barely responded to the aggressive easing of the Federal Reserve, the supply of for-sale vacant units continues to grow, and much tighter underwriting is locking many would-be homebuyers out of the market. “With home prices falling in most metropolitan areas, homeowners are tightening their belts, remodeling less, and staying on the sidelines.” Buyers are also entering foreclosure at a record rate, thanks to lax lending standards that saw the number of borrowers paying more than half their income on housing skyrocket from 6.5 million in 2001 to 8.8 million in 2006, according to the study’s data. The number of homes entering foreclosure nearly doubled to 1.3 million in 2007 from about 660,000 in 2005 — numbers that are likely to get much worse this year, based of activity thus far.
The Harvard center, known for its rather optimistic forecasts and analysis, manages to paint a dispiriting picture of how severe and structurally ingrained housing affordability challenges have become. Consider that by 2006, 17.7 million households—about 15.8 percent of all households—were spending more than half their income on housing. Even 34 percent of households with incomes equivalent to 1-2 times the federal minimum wage, and 15 percent with incomes equivalent to 2-3 times this wage, spend more than half their incomes on housing. These are the groups that have been hurt the most by the industry-wide downturn, and the group’s somber conclusion is that if the economy slips into recession or job losses keep racking up, household growth and homeownership demand could fall even more. On the other hand, the report sounds a more optimistic note about the medium to long-term. “At some point demand will bounce back,” Retsinas said, although he made no predictions of when that might be — with good reason, too. “Historically, housing markets recover only after the economy has entered a recession and a combination of falling mortgage interest rates and house prices have improved housing affordability,” he said. “It is difficult to judge how far away from these conditions we may be.”