PERSON OF THE WEEK: David Berson On The State Of The Housing Market

when exactly is the housing market going to hit bottom – and what happens after that ‘thud’ occurs?[/b] This week, MortgageOrb talks with David Berson, chief economist at The PMI Group Inc. in Walnut Creek, Calif., to discuss the housing market's state of health. [b] Q: What is your forecast for housing prices in 2009 and 2010?[/b] [b]Berson: [/b]The most important thing to note with regard to house prices is that they will differ across the country, so a national average forecast will hide significant regional variation. Even if the bottom in home sales is reached in the first half of this year (as we expect), there are so many homes for sale (plus many more vacant homes not yet on the market that are probably real estate owned properties and will eventually be put on the market) that national house prices are projected to continue falling through 2009 and into early 2010. We currently forecast that national house prices (as measured by the median price of existing homes sold) will decline by around 10% in 2009, after falling by 9% last year. With continued gains in home sales expected in 2010 and finally some reduction in unsold inventories, we currently project that home prices will be little changed next year – a significant improvement over the past couple of years. [b]Q: What will the signs be of a bottoming in the real estate market?[/b] [b]Berson:[/b] Just as the real estate market differs across the country, different parts of the real estate market will begin to recover at different times. We think it is likely that the bottom in home sales has already been reached, or will be reached soon. Certainly a large part of this has come from foreclosure and short sales, which still help to boost the market by taking unsold inventory away. These sales will continue at high levels for a while. More fundamental increases in home sales should increase soon – boosted by a combination of record-high affordability and increasing pent-up demand (small now, but it will grow over time). [b]Q: Where does the recession play in this?[/b] [b]Berson:[/b] In every recession for which we have data, the housing market has always begun to expand before the recession was officially over – and often long before the job market began to improve. So it doesn't take a rebound in employment or a decline in the unemployment rate for the home sales to start to recover. Over the course of 2009, we should see modest increases in home sales, with bigger increases in 2010 as the job market improves. (An expanding job market is positive for housing, but not a requirement for a housing turnaround). Given the still-high level of unsold inventories, however, housing starts will lag in the turnaround in sales and the economy in this cycle – an unusual occurrence. [b]Q: Why are we seeing different numbers in competing house price indices (HPIs) (Case-Shiller, FHFA and Loan Performance)?[/b] [b]Berson: [/b]While each of these repeat-transaction HPIs show different numbers, they all show that U.S. house prices have fallen sharply from their peaks. For example, at the end of 2008, the national Case-Shiller HPI was down by 26.5% from its peak in early 2006, the Federal Housing Finance Agency (FHFA) purchase-only HPI was down by 9.9% from its mid-2007 peak and the Loan Performance HPI was down by 17.9% from its mid-2006 peak. But why are the results so different? Although there are some technical differences between the statistical techniques used in the construction of each of these HPIs, the primary reason is differences in coverage. The FHFA HPI uses data only from Fannie Mae and Freddie Mac. As a result, it excludes all jumbo and virtually all Federal Housing Administration/Department of Veterans Affairs loans – and it includes less than the market average of subprime and Alt-A loans. The parts of the mortgage market that are either excluded or have reduced coverage in the FHFA HPI are precisely those that have performed the worst with respect to house prices, so it is little wonder that the FHFA HPI shows the smallest decline of the three competing HPIs. The Case-Shiller HPI is a much broader measure of house prices than the FHFA index, using public records data on home sales that include jumbos, government-insured loans, and the full market measure of subprime and Alt-A loans. It also includes prices from foreclosure sales. The wider coverage of loans in the Case-Shiller index explains much of the difference from the FHFA measure. The Loan Performance HPI uses lender data to get information on house prices, and it estimates that it covers more than 95% of all transactions. Since it doesn't use public source data, it is not limited in those jurisdictions that don't require the posting of house prices when a home is sold. [b]Q: Have there been any positive benefits from the ongoing crisis? Berson:[/b] The current downturn in housing and mortgage markets has been the driving force behind the deep worldwide recession and the loss of nearly $12.7 trillion in U.S. household assets since mid-2007. Still, we think two positives have resulted from this. First, while the sharp decline in house prices has been a disaster for current homeowners, the resulting increase in affordability is a significant positive for potential first-time home buyers – many of whom were effectively shut out of the housing market by high prices. Second, the current crisis reminds us that risk matters. Financial markets significantly and systematically underpriced risk for a number of years, but the negative results over the past couple of years have resulted in a reappraisal of risk. Once markets have stabilized, better pricing of risk should allow the housing market to expand as a result of sustainable homeownership rather than being boosted, in large part, by a combination of investors and homeowners who could afford (even if briefly) to buy only through the use of riskier mortgage prod


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