[progchat_action] The Worst-Case Scenario for Housing
 
Date: Sat, 1 Mar 2008 01:49:39 -0600 (CST)


The Worst-Case Scenario for Housing

Forecasters say a 40 percent drop in home prices from their peak is
possible, though quite unlikely

By Kirk Shinkle
US News and World Report
February 28, 2008

A year ago, most economists talked in worried tones about the possibility
that American home prices could slip after almost doubling during the prior
decade. At worst, fretted Wall Street's more bearish forecasters, prices
could drop as much as 20 percent from their peak in a more dire version of
the last housing downturn during the early 1990s, when new-home sales dipped
but existing homes held their value.

Fast-forward to today, and the scope of those concerns looks almost quaint.
Home prices are already falling fast (with builders offering huge rebates on
new homes), and the only question now is: Just how low can they go?
Forecasts by Moody's Economy.com now use a 20 percent drop in median
existing-home prices from their 2005 peak as a baseline, with prices
weakening through at least mid-2009. The forecast assumes the United States
is already in a mild recession.

And that is the good news. "Our weaker scenario...is a 25 percent decline in
prices," says Celia Chen, Moody's director of housing economics. "That would
be in the case of a housing and credit crash and still a moderate
recession." There are new worst-case whispers as well. "You want the
darkest? Forty percent," she says. "There's your apocalypse."

That's right. In Moody's most pessimistic (and most unlikely) scenario,
existing-home prices plummet by 40 percent from their peak. A drop like that
would certainly plunge the economy into a deep recession, push unemployment
to around 9 percent, and hamstring economic growth in a way that could take
years to undo. The shock of falling home prices and tight credit markets
would spill into everything from consumer spending to business investment.

Ouch. Mix in the huge glut of unsold houses on the market, and such a
catastrophe would be a recipe for a huge devaluation of not just homes but
other assets, like automobiles. Tight credit would exacerbate the pain,
forcing interest rates on bank loans to climb. It would also coincide with a
generation of retiring baby boomers who watched home prices soar and pared
back their personal savings accordingly, notes Merrill Lynch.

Last year, the primary culprit behind the turmoil in the housing, credit,
and equity markets was the threat of defaults on subprime mortgages. The
accompanying rise in default and foreclosure activity is distressing, but in
some ways it's also old news. The next villain, if the credit crunch
continues, will be corporate debt. "If the credit tightening spills over
into the corporate debt market in a significant way, that would result in a
much deeper recession than we're expecting, and that in turn would drag home
prices down further," Chen says.

Worse-than-expected home price declines come on top of the damage already
done by several months of housing-related turmoil. "These are almost the
1979-82 [numbers]-the worst housing depression of the postwar era," says
Richard DeKaser, chief economist at National City Corp. Back then, however,
double-digit inflation and interest rates were the rule. Today, all of those
factors are relatively in check.

Still, the worst scenarios will most likely prove no more than a cautionary
tale. Home prices remain a largely local phenomenon, with the largest
declines coming in parts of the country that watched prices soar the most
during the boom. Also, there are rosier forecasts than Moody's. Lawrence
Yun, the chief economist at the National Association of Realtors, says the
worst outcome for housing would require a period of stagflation-slow growth
and prolonged job losses coupled with rising inflation. Most analysts expect
the economy to avoid that '70s-era threat as inflation cools amid slower
growth.

Yun expects the economy and the housing market to recover in the second half
as Federal Reserve interest rate cuts and the government stimulus kick in.
"In terms of home sales activity," he says, "we may be scratching the
bottom." Even if that turns out to be true, it will be a long time before
cocktail party chat is dominated by tales of how much your home has gone up
in value

http://www.usnews.com/articles/business/real-estate/2008/02/28/the-worst-cas
e-scenario-for-housing.html

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