Insight into a grim housing market

Chris Farrell From chief economics correspondent Chris Farrell

The news on the housing market is grim. To get another read on the market, I decided to look at what Morris Davis, professor of real estate and urban land economics at the

Wisconsin School of Business at the University of Wisconsin, Madison, is writing. He does some of the more insightful research into the dynamics of the housing and rental market. Maybe I decided to look him up because I’m at the airport near Green Bay, WI, (waiting the fly back to the Twin Cities). His latest paper is Reflections on the Foreclosure Crisis. It’s from June, 2010, but it makes for sober reading.

He calculates that the foreclosure crisis is far from over. And “crisis” is certainly the right word. Davis notes that in the 27 1/2 year period between 1979 and mid-2006, for example, there was a cumulative total of 7.5 million foreclosure proceedings. That’s a rate of 275,000 a year. Yet in the 3 1/2 year period between mid-2006 and year-end 2009, 6 million foreclosure proceedings had been started–an annual rate of 1.7 million per year. He expects 4 to 5 million foreclosures this year and next.

Davis argues that two triggers behind the foreclosure epidemic. First, homes are worth less than the mortgage. They’re underwater. To paraphrase the philosophers, that’s a necessary but not sufficient condition. The second foreclsoure trigger is unemployment. Well, the past few years have the worst housing market and the worst labor market in 60 years. ” Both foreclosure triggers are still in place,” writes Davis.

Specifically, the Congressional Budget Office is forecasting that the national unemployment rate will remain above 9.0 percent in both 2010 and 2011. Many homeowners will remain under water. Davis assumes that house prices and housing rents will increase at the same rate over the next few years–a reasonable assumption. In that case, he estimates that house prices could rise in nominal terms by somewhere between 1 percent and 2.5 percent a year for the next two years.

My read: The housing market will stagnate at best for the next couple of years.

Got to board the plane now.

  • Peter T

    “Davis assumes that house prices and housing rents will increase at the same rate over the next few years–a reasonable assumption. In that case, he estimates that house prices could rise in nominal terms by somewhere between 1 percent and 2.5 percent a year for the next two years.”

    From 1997 until 2006, we had the largest boom in housing prices in the US. The bust started in 2006 but has been arrested now by government support who distributes the losses of the banks to all taxpayers, as normal. Why housing prices should increase by 1 to 2.5 percent from here on is beyond me – when the government support of the artificail market is taken away, housing prices will continue their fall.

  • loaliowLica

    so informative, thanks to tell us.