Wednesday, June 14, 2006

New Harvard Study supports Soft Landing?

It was widely reported yesterday that Harvard University’s Joint Center for Housing Studies a released their “State of the Nation Housing 2006” (as well as a Fact Sheet) and that it called for general cooling in the nations housing market and not a market crash as purported by many “doom and gloom” theorists.

The purpose of this report, funded in part by the National Association of Realtors, National Home Builders Association, Fannie Mae, and Freddie Mac, was clearly to legitimize both the current market prices as well as suggest that historic future demand (rationalized by projected demographic data of baby boomers, immigration, and rapid new household creation) would be not only sustain current prices but drive them up even further.

Additionally, there is a suggestion of a “soft landing” whereby the current slowdown will only server to cool the housing market long enough to allow incomes to “catch up” to current home prices.

But again, as has occurred on a number of occasions recently, this report highlights at least as much bearish evidence of current housing market instability as it does bullish future projections.

Key facts highlighted in the report:

  1. 20% of dollar value of all loans originated in 2005 were interest only loans.
  2. 37% of all 2005 ARM loans were interest only.
  3. 10% of all loan originations in 2005 were principle “payment option” loans.
  4. Between 2001 to 2004, the number of households paying more than half of their incomes for housing shot up by 1.9 million. This increase brought the total number of low- and middle-income households with severe cost burdens to 15.6 million.
  5. The amount of home equity cashed out in refinances set another record in 2005, up a whopping 66 percent to $243 billion in real terms. In the past three years alone, owners extracted $150 billion more in equity through refinancing than they had in the previous eight years.
  6. The volume of subprime loans has grown dramatically from just $210 billion in 2001 to $625 billion in 2005 in real terms

Interestingly, the report highlights a decade of seemingly stalled income growth as a factor in generating “Strong Demand Fundamentals” by stating “With each generation exceeding the income and wealth of its predecessor, growth in expenditures on home building and remodeling should match if not surpass the current pace. For example, the median inflation-adjusted income of households in their 40s was $1,800 higher in 2005 than in 1995, while that of households in their 50s was $1,900 higher”.

Of course, the report doesn’t forget to include a major loophole to their optimistic forecasts when stating that “if the economy falters, both job growth and housing prices will come under renewed pressure. This would spark higher default rates, especially among subprime borrowers, and turn housing from an engine of economic growth to a drag.”

The report also mentions that “The most immediate risks to the housing market now come from the rise in interest rates, the erosion of affordability after years of strong house price appreciation, and the growing inventory of both new and existing homes for sale.”

The report also adds that “...unless the broader economy stumbles and job losses mount, home sales and construction activity will likely dip only modestly.”

Given the current trend weakening of home sales and the especially striking about face in new construction activity as well as the recent effects of the current inflation worries, looming worldwide credit crunch and probable forthcoming consumer recession, this report seems either overly optimistic, outdated or just simply out of step with reality.