Florida Housing Market Slump to Continue Past 2007
The Florida housing market downturn that began nearly two years ago will last at least through the end of 2007, remaining a major drag on the U.S. economy. The culprits: a glut of homes for sale and growing caution among Florida mortgage lenders who now regret being so free with their mortgages during the boom.
Most forecasters still expect the economy to regain some momentum this year after a slow first quarter. Recent data have shown manufacturing, business investment and trade on track to help offset the negative effects of falling home values on consumer spending. Even so, some economists expect economic growth this year to remain tepid, largely because of the weak housing market.
This worry coincides with a surge of inflation anxiety that has roiled stock and bond markets in recent days. Yields on 10-year Treasury bonds, which influence the cost of various forms of borrowing throughout the economy, have risen above the psychologically important 5 percent level to the highest point in nearly 11 months.
That in turn has led to a big drop in stock prices: Both the Dow Jones Industrial Average and the Standard & Poor’s 500 fell nearly 2 percent for the week after hitting all-time highs early on.
The rise in Florida mortgage rates is only adding to the gloom. The average rate for 30-year fixed-rate mortgages stood at about 6.65 percent Friday, up from 6.35 percent in early May, according to HSH Associates, a financial-publishing firm in Pompton Plains, N.J.
Federal Reserve Chairman Ben Bernanke acknowledged in a speech Tuesday that the housing market remains weak, and warned that residential construction “will likely remain subdued for a time, until further progress can be made in working down the backlog of unsold new homes.”
Late last year, some economists were saying the market would start bouncing back by the middle of 2007. That hasn’t happened, partly because inventories of unsold houses have continued to grow and a surge in mortgage defaults has made lenders much more reluctant to grant credit to Florida mortgage holders with spotty payment histories.
David Resler, chief economist at Nomura Securities International Inc. in New York, says he is surprised by the degree to which speculation caused builders to overestimate demand, leaving a glut of houses and condominiums.
That means single-family housing starts, which have declined 33 percent since early 2006 to a seasonally adjusted annual rate of about 1.2 million in April, will remain low, around the current level, through the first quarter of 2008 before starting to recover gradually, Resler predicts.
Reflecting this worse-than-expected slump, Resler recently trimmed his forecast for economic growth in the second half of this year to an annual rate of 2.8 percent from 3 percent. He sees about a 33 percent chance that the U.S. economy will slip into a recession in the next year. If it does, he says, the weak housing market would be largely to blame. Among the risks, he says, are that depreciating home values will make consumers more cautious in spending and that many more housing-related jobs will be lost.
Housing accounts for a lot of jobs, not only in construction but in related areas such as Florida mortgage loan finance and furniture sales. Zoltan Pozsar, senior economist at Moody’s Economy.com, estimates that housing-related sectors created nearly 1.3 million jobs between January 2003 and March 2006. Since then, he says, housing jobs have declined by almost 300,000. He sees more losses to come during the summer, which is usually a big building season.
Home values can also influence consumer spending, as people use cash-out mortgage refinancings and Florida home equity loans to pull money out of their houses. At the peak of the housing boom in the third quarter of 2005, people were taking cash out of their homes at an annual rate of $709 billion, according to Michael Feroli, an economist at J.P. Morgan Chase & Co in New York. As of the first quarter of 2007, that number had fallen to $178 billion.
A prolonged housing slump would be particularly painful for retailers of the kinds of things people often buy when they move, such as building and gardening supplies. According to the Commerce Department, those retailers saw sales drop by 6 percent in the year ending April.
Meanwhile, empty houses are multiplying. A recent Merrill Lynch report tallies a record 2.2 million vacant single-family homes and condos for sale nationwide, about one million above the norm. Florida’s Miami Dade County has a 31-month supply of existing condos on the market. About 20,000 new ones will be completed by the end of 2008, says Jack McCabe, a consultant in Deerfield Beach, Fla.
He says about two-thirds of those have been sold, but many buyers are canceling orders rather than taking possession of a depreciating asset.
Economists at Merrill Lynch admit it is hard to predict how the slump will play out from here. “We are not sure how deflating a $23 trillion asset class - the value of real-estate assets on the household balance sheet - will end, but we doubt that it will end well,” Merrill economists wrote in their recent report.’
SOURCE: The Bradenton Herald
