HUD Head Says Housing Bottoms Off

American home prices may start rising as soon as the 3^rd quarter as a foreclosure decline makes more homes available for sale, according to Housing and Urban Development Secretary Shaun Donovan.  “It’s very unlikely that we will see a significant further decline,” Donovan said.  “The real question is when will we start to see sustainable increases.  Some think it will be as early as the end of this summer or this fall.”  Home sales have increased in six of the past nine months; the number of homeowners in default is declining, Donovan said on CNN’s “State of the Union” program.

“In the long run, it’s a good time to buy,” Donovan said.  “It’s so affordable today compared to where it’s been for generations.”  Contracts to purchase previously owned homes rose 8.2 percent in May, following a revised 11 percent drop in April, according to the National Association of Realtors (NAR).  Another NAR report showed sales of existing houses, which make up about 96 percent of the market, fell in May to a six-month low.  Home prices fell four percent in April over 2010, the biggest decline in 17 months according to the S&P/Case-Shiller index of values in 20 cities.  An estimated 1.7 million U.S. homes were in the foreclosure process and expected to be put on the market in April, representing an 18 percent decline from the peak, as fewer loans entered delinquency and more distressed homes were sold, CoreLogic Inc. said.

Additionally, Donovan said that foreclosures are down approximately 40 percent when compared with last year.  Although 1.3 million homes are still in the foreclosure process, Donovan said that housing prices are stabilizing in the aftermath of the worst financial crisis since the Great Depression.  According to Donovan, “So, we are making progress, but rightly, the American people recognize we’re not where we need to be.  We still have a ways to go.”

On the subject of requiring 20 percent downpayments to buy homes, Donovan said there should be a way for qualified people to buy a home with less money upfront.  “We can’t go so far in the other direction that we cut off home ownership for people who really can be successful homeowners.  We can get back to the place where it’s a good investment and we will be able to make money over time,” Donovan said, noting that Americans should no longer view their homes as ATMs.

Financial analyst A. Gary Shilling, writing in The Christian Science Monitor, isn’t as optimistic.  In fact, he thinks that housing prices are likely to fall another 20 percent before bottoming out.  According to Shilling, “Many housing optimists a year ago believed not only that the housing collapse was over, but also that a robust rebound was under way.  Low mortgage rates and collapsed housing prices, not to mention the $8,000 federal tax credit for new home buyers and other initiatives, seemingly were going to kick-start housing activity nationwide.  Then a funny thing happened on the way to the housing recovery.  The tax credits expired, home sales dried up, and prices resumed their declines from their 2006 peak.  Excess inventories piled up due to overbuilding and mounting foreclosures.  In the meantime, buying those lower-priced houses became more difficult as lenders, burned by the housing crash, tightened lending standards and increased downpayment requirements.  As a result, the housing sector not only has failed to bolster the weak economic recovery but is also likely to continue to struggle for years.  And that’s bad news for the economy, which has softened in recent months.  Excess inventories are the mortal enemy of housing prices.  Lower prices are needed to unload surplus inventory, but in turn, lower prices bring forth more inventory from anxious sellers.  The anxiety of house sellers and the reluctance of buyers are enhanced by the realization that house prices can fall – and are falling for the first time in 70 years.”

The idea of owning a home is becoming less attractive as many people realize that it may be many years before prices stop falling and stabilize, let alone revive.  As proof, the national homeownership rate has fallen from its late 2009 peak of 69.2 percent to 66.4 percent in the 1^st quarter of 2011 – the exact same level as in late 1998.  As homeownership loses its luster, rental apartments are gaining.  The homeownership rate is likely to continue to decline to its earlier long-term trend of around 64 percent as people continue to separate their abodes from their investments and as the baby boomers age, retire, and downsize.  That means approximately 4.5 million new renters in coming years.  Apartment construction, which normally totals 300,000 units annually, will be vigorous once surplus vacancies disappear.