The worst is over, but the economy and housing in particular will remain subpar and unable to perform at normal, healthy levels.

Looking into our crystal ball for 2010, we see a long haul back to full health following a long, brutal recession. The national economy will continue to gain strength throughout the year, but at a slower pace than is characteristic for the early stages of recovery.

Real (inflation-adjusted) gross domestic product (GDP) is expected to grow about 3% in 2010, compared to essentially no growth (0.4%) in 2008 and negative growth (an estimated decline of 2.5%) for 2009.

While this year’s relatively sluggish growth will be sufficient to produce gains in employment, the pre-recession employment peak won’t be reached for a long time and the unemployment rate will languish at an unacceptably high level.

Coming off an estimated modern historical low of 555,000 total starts in 2009, housing production should rebound by about 25% this year to just under 700,000 units, according to NAHB projections. There is certainly a measure of good news in this forecast, but it hardly represents a return to normalcy.

Based on demographics and other factors, an annual average of 1.8 million housing starts per year will be needed over the next 10 years and 2010 starts are not likely to provide even half of what is needed.

Improvements in residential construction this year will be largely concentrated in single-family construction. Builders successfully reduced their inventory of new single-family houses in 2009 to levels last seen in 1971 — for a population that has grown by 80% since that time.

NAHB is forecasting just over 600,000 single-family starts in 2010, up from an estimated 440,000 starts in 2009. In a normal market, we would be constructing 1.5 million single-family starts on average yearly.

Although multifamily housing activity should stabilize and improve by the end of 2010, it will be slower than in 2009, with starts declining from an estimated 112,000 last year to an even lower 87,000.

Difficulty in obtaining financing for condos and apartments remains a major stumbling block to new projects, followed closely by historically high vacancy rates that are expected to ease up by the second half of the year, though not by much.
 

However, since existing home sales are based on settlements that do not capture new contracts but rather reflect sales agreements from earlier months, many of the November sales resulted from pressure on buyers to close by the end of that month to qualify for the then expiring first-time home buyers tax credit. (The tax credit has since been extended into 2010 and expanded to include repeat home buyers. See www.FederalHousingTaxCredit.com for details.)

After this burst of activity, it was not surprising to see the National Association of Realtors (NAR) Pending Home Sales index, which is based on the acceptance of new sales agreements for existing homes, fall 16% in November. Even so, the index was 15.5% higher than the same month a year earlier, a hopeful sign that housing has turned the corner and that the extension and expansion of the tax credit is having some early, positive effect.

Similarly, new home sales, which are based on signed contracts with a deposit, fell in November to a seasonally adjusted annual rate of 355,000, their lowest level since April 2009. That was down 11.3% from October’s 400,000 and down 9.0% below the 390,000 sales pace one year earlier.

Although the extended and expanded home buyer tax credit was signed into law early that month, potential buyers were under no immediate pressure to go out and purchase a new home since they had until April 30 to sign a contract and until June 30 to close in order to qualify for the tax credit.

The reaction was also delayed when the 2009 home buyer credit was signed into law in mid-February. New home sales fell in March and rebounded in April, but were still below their February level. It wasn’t until May that new home sales took a real leap upward, with the uptrend continuing into June and July.

With the revival of single-family residential construction, the Census Bureau’s statistics on the value of construction put in place, which estimate the effects of on-going construction and include improvements, have risen over the past six months (June through November). However, the value was down 24% from a year earlier as a result of the slow crawl toward recovery in residential construction and lower average home values in 2009.

The value of multifamily construction put in place also showed dramatically, falling in 13 of the last 14 months. In seven of those months, it fell by 5% or more. On a year-over-year basis (November 2008 to November 2009), it was down 45%. [return to top]
 

Further, the year-over-year decline is no longer in the double digits that prevailed for more than a year and a half. The Federal Housing Finance Agency (FHFA) price index rose in the second and third quarters. As of the third quarter of 2009, it was down only 3.7% from the third quarter of 2008.

The first-time home buyer tax credit was instrumental in helping stop the free fall in house prices. The extended and expanded tax credit should prevent further dramatic declines in these prices, boosting the confidence of prospective buyers to re-enter the housing market. According to the S&P/Case-Shiller price index, house prices are back to around their fall 2003 levels.

In many states and metropolitan areas, home prices and inventories have settled back to their long-term trend levels or below. In these areas sustainable production levels are possible going forward. The only uncertainty remaining is consumer confidence. In locations where excess inventory remains, house prices will continue to be soft and further declines are possible.

The national house price indexes will be determined by the delicate balance between the excess-supply markets and the markets that have found their equilibrium. NAHB is forecasting flat house price movement on a national level through the second quarter of 2010. [return to top]
 

The job market, though improving, remains weak; potential home buyers still need large downpayments and near stellar credit to obtain a reasonable mortgage; and builders continue to face difficulty in obtaining acquisition, development and construction (AD&C) loans and, in many cases, have been burdened with significant adverse changes to the terms of existing loans.

These difficulties have included reductions in the size of loans and lines of credit, demands for increased equity for outstanding loans and, in some cases, demands for full repayment of outstanding loans. It has not been uncommon for these increased requirements to transform a performing loan into a non-performing loan.

Inaccurate appraisals are also hindering a faster housing recovery. These occur when an appraiser (often from outside the area being appraised) uses sales from a dissimilar neighborhood as a comparison or uses a foreclosure or short sale as a comparison without proper adjustments for differences in the condition of the homes.

Foreclosures are yet another drag on numerous housing markets. Many of the foreclosures and past-due mortgages are concentrated in the formerly hot markets — parts of California, Las Vegas, Phoenix and southern Florida — and economically distressed markets, primarily in the Great Lakes region of the upper Midwest.

Based on data from the Mortgage Bankers Association, in the third quarter of last year, the five states with the highest rates of initiated foreclosures, in descending order, were Nevada, Florida, Arizona, California and Michigan. These five states accounted for almost half (48%) of all foreclosures started in the U.S. These same five states (in the same order) also had the highest rate of mortgages 90 days past due, which is generally a sign that most of them are headed to foreclosure.

Even with an improving economy and the home buyer tax credit, foreclosures will be fed by the weak employment market and are likely to continue to rise into the first part of 2010, especially in these areas. [return to top]
 

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To learn more, visit www.housingeconomics.com. [return to top]