I always enjoy listening in when our Chief Economist Lawrence Yun prognosticates. Dr Yun has developed a little sense of humor during the past few years, and while not nearly as eloquent or entertaining as David Lareah in his heyday, Yun is able to translate the numbers to his audience much better than 3 or 4 years ago – even though the numbers aren’t nearly as entertaining. And he’s believable. He was recently named one of the countrys 10 most trusted economists by USA Today. I’ll take trust over entertainment any day.
According to Dr. Yun this morning, aided by the home buyer tax credit, the outlook for housing and the economy appears headed for a sustainable . “Things are looking much better”. The projections are enhanced by a tax credit expansion to more home buyers through the middle of 2010. “Given the success of the first-time buyer tax credit to date, and the need for qualified buyers to continue to absorb inventory that will include additional foreclosures over the coming year, we are hopeful about the impact of the expanded tax credit because it will stabilize home prices,” he said. “In fact, the credit is working better than first projected – it now looks like we’ll have 2.3 to 2.4 million first-time buyers this year.” He estimates that 350,000 – 400,000 of those would not have purchased right now – would not have gotten off the fence without the tax credit. Overall impact from the tax credit extension & expansion will give a 15% boost to existing home sales.
“We’ve seen a steady downtrend in housing inventory for well over a year and home prices appears to be in the early stages of stabilizing. We’ve also seen 8 straight months of seasonally adjusted sales increases. With expansion of the tax credit to additional buyers through the middle of next year, and no major unforeseen events impacting the economy, home prices should rise between 3 and 5 percent in 2010, but with wide geographic differences,” Yun said.
Yun also talked about the difference between a tax credit and just letting prices drop further. To consumers the $8,000 credit looks the same as an $8,000 price reduction. But to the market, an $8,000 price reduction means a 4% drop in wealth or another $730 billion destruction of housing wealth and further negative economic impact. We’ve already lost $4 trillion in housing wealth from the peak and all the money the bubble made has been removed – in fact many markets are over-corrected at this point.
We are experiencing a bifurcated recovery – under $500,000 has been very resilient while over $500,000 continues to lag badly.
Yun also questioned whether first time buyers are used up or pent up? In 2000, pre-boom, there were 11 million renters who could qualify to purchase if they wanted to. Today there are 16 million. The demand remains and there are still a lot of people sitting on the fence hoping to buy at the absolute bottom of the market. The move-up and upper end markets also have a lot of room for improvement but that will wait until consumer confidence starts to rise again – it hasn’t yet.
The recent increase in velocity stimulates economic stability, helps price stabilization and eliminates that fear factor which will lead to more demand as people realize things are looking better. With unemployment expected tom peak mid-2010 (although remain at around 10% for awhile) we will see a gradual decline in foreclosure activity as home values start to increase. That makes it easier for re-sets to stay in their homes and reduces the trend to strategic defaults. Bank balance sheets will improve and lenders will increase their activity both on mortgages and business loans.
“The size of the U.S. budget deficit is a concern going forward, and carries the risk of higher inflation. At this point, that risk appears to be restrained,” Yun said. The federal deficit has more than tripled this year to $1.4 trillion. The government must start showing they have a plan and the political will to curb that debt and start soon. They must do it judiciously in order not to shut off the recovery but they must act soon or our foreign lenders will start to get nervous, the money supply will contract and there will be a significant rise in interest rates to the 7% – 8% range, which would effectively shut down any recovery. Yun does not believe that will happen and does not see a ‘double-dip’ recession in the future.
You can download all of Dr. Yun’s slides from this mornings presentation right here. Use them at your next office meeting and you too will sound like you have a clue.