Jan Hatzius, Economist for Goldman Sachs on Real Estate
The following are comments compiled by Wall Street economist Jan Hatzius of Goldman Sachs. Notable for his bearish forecasts, he was listed atop of 52 Wall Street economists in The Wall Street Journal′s economic-forecast rankings.
“Over the last year, policymakers have boosted the housing market by reducing foreclosures, slowing the pace of distressed sales, and stimulating demand for owner-occupied housing. The effects of these policies are evident in a swelling foreclosure pipeline, a surge in first-time home purchases, and abnormally low mortgage rates. We estimate these policies have reduced foreclosure supply by 450,000 and increased demand by 200,000. Taken together, these moves might have added 5% to home prices nationally. If this estimate is correct, it suggests most of the increase in home prices since the spring—which has totaled between 2% and 4% in seasonally adjusted terms—has been due to temporary factors.”
“In 2010, we expect some of these supports to fade. Fed and Treasury purchases of mortgage-backed securities will taper off, and the pause in foreclosures created by federal mortgage modification programs may end. The federal tax credit for first-time home buyers appears likely to be extended for at least a few months, but probably no longer than through the first half of 2010.”
“Our conclusion is that despite the better recent data—including stronger-than-expected report on existing home sales in September—the risk of renewed home price declines remains significant, and our working assumption is a further 5%-10% decline by mid-2010. However, the cloudy policy outlook adds to our already considerable uncertainty of where house prices will ultimately bottom.”
when you consider there are potentially another 8 million homes that could be foreclosed on in the next 4 years. But if you look at the current national average home price it is back to around 2003 levels which is before homes values began to increase by double digits, the norm being 3-5% year prior to this. The key to not going where you project is job creation, once the unemployment stabilizes and reverses home prices will level the longer that takes the lower home prices will go. Its not about your chart its about jobs, your chart exists in a vacuum the economy does not.
Now with the residentual ARMs resetting and commercial real estate financing in the tank, we have some near term hard evidence of more home foreclosures and business failures that will have an impact on values.
Studies show that each foreclosure within 2 blocks of your house lowers the value of your property. This month’s reset will not be the last and subsequent resets will also negatively impact values.
Some homeowners need to move and others want to move. Those that need to move will suffer if they sell and also lead their old neighborhood’s value down. Those that only want to move will stay put hoping for a better price. Many people have a good portion their retirement nestegg locked up in their home’s value. This will in effect lock many homeowners out of upgrading or downsizing.
That leaves the residential market to first time buyers and investors, which are two groups we see last in support of a sound market. This is a real trap.
The market still has some downside, but the percentage of drop depends on location, location, location.