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Wednesday, 9th July 2008

The Sharp Housing Downturn Continues to Pressure the Economy

The Sharp Housing Downturn Continues to Pressure the Economy
Source: Joint Center for Housing Studies, Harvard University

The nation is in the throes of a housing downturn that is shaping up to be the worst in a generation, finds The State of the Nation’s Housing report issued today by the Joint Center for Housing Studies of Harvard University. While the falloff in housing starts, new home sales, and existing home sales already rivals the worst downturns in the post World War II era, home price declines and mortgage defaults are the worst on records that date back to the 1960s and 1970s.

“The slump in housing markets has not yet run its full course,” concludes Nicolas P. Retsinas, the director of the Joint Center for Housing Studies. “Mortgage rates have barely responded to the aggressive easing of the Federal Reserve, the supply of for-sale vacant units continues to grow, and much tighter underwriting is locking many would-be homebuyers out of the market. With home prices falling in most metropolitan areas, homeowners are tightening their belts, remodeling less, and staying on the sidelines.”

The report observes that the number of homeowners paying more than half their income on housing rocketed from 6.5 million in 2001 to 8.8 million in 2006. This reflects looser lender enforcement of debt-to-income caps and the widespread use of mortgages that have been resetting to higher payments. With so many stretched thin and home prices falling in many areas, foreclosures are skyrocketing. The number of homes entering foreclosure nearly doubled to 1.3 million in 2007 from about 660,000 in 2005. The report concludes that these high levels of foreclosures will continue to exert extreme downward pressure on prices, especially in low-income and minority areas, where riskier subprime loans are most heavily concentrated.

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