5 Reasons the Housing Recovery Will Be Slow

After more than a year on direct government life support, the housing market is having a particularly rough time now that Uncle Sam has pulled the plug and ended the home buyer credit. Home sales may be down as much as 42% since the end of April. According to a new report by Harvard's Joint Center of Housing Studies released today, home sales might not improve for some time.

The "State of the Nation's Housing 2010" report (.pdf) argues that the housing market recovery will be a slow one. While the report takes 44 pages to explain its reasoning, here's a snapshot at five central arguments why:

1. Unemployment expected to decline very slowly

The report argues that the labor market is a key driver for home sales. If a family includes an adult unemployed due to the bad economy, chances are pretty good that it can't afford to buy a home. Moreover, unemployment has a strong connection to consumer confidence. If Americans aren't feeling good about the economy, then they'll be less likely to purchase a home. Here's a chart the report provides showing the correlation:

h-housing 2010 fig 2.PNG

As long as unemployment is high, home sales will likely be low. Since most economists expect the labor market recovery to be quite slow, so should the housing market recovery.

2. Vacancy rate to remain high

Another huge problem: vacant housing units. Recent foreclosure data shows that banks are only now beginning to liquidate some of their shadow foreclosure inventory, while the defaults continue at high rates. Home inventory is growing -- not shrinking. Rentals are also increasingly vacant. All of this will put pressure on home prices, which will worry potential buyers, who will want assurance that the market has hit bottom. Here's a chart on vacancy from the report:

h-housing 2010 fig 7.PNG

3. Little growth from Millennials

At some point, more young Americans in their 20s would normally begin buying homes over the next few years. But the recession has hurt that population more than others, as this chart shows:

h-housing 2010 fig 32.PNG

This will harm their ability to buy a home over the next several years, as unemployment stunts workers' lifetime salary growth. And considering the awful housing bubble they witnessed during their formative years, they might also be less eager to buy a home than previous generations. Think about how living through the Depression affected that generation's attitude towards spending and saving.

4. Tighter loan standards

The banks and finance companies learned an important lesson during the housing bubble: not just anyone should get a mortgage. As a result, they're pulling back. While it's hard to know precisely how much they've reined in their credit requirements, check out this chart about the government underwriters:

h-housing 2010 fig 22.PNG

You can expect that private underwriters are even more conservative than these government agencies. So this chart likely underestimates the amount of credit tightening.

5. Demand sapped

The report says:

Finally, although picking up steam in the spring 2010 buying season, home sales will have to weather the expiration of the federal homebuyer tax credit. When the first round of credits expired in fall 2009, there was a noticeable falloff in sales. This time, though, the improving labor market may be enough to avoid a similar dip.

Apparently, whoever wrote this report hasn't seen the data for mortgage applications for purchases since the end of April. They're down 42%. That's more than a 'noticeable falloff' -- it's an incredible drop. During the year ending April 30th, potential home buyers were in an environment that was unprecedented on a historical scale. Prices had dropped, very low in many markets. There were short sale and foreclosure bargains. Interest rates were very low. And, of course, there was a huge government tax credit available. All of these factors likely drove people to buy a home who might have normally waited a year or more to do so -- not just a matter of months. If that's the case, then demand will suffer for a long time.