A Tale of Two Real Estate Markets
The question for housing: Where’s the
basement?...
…while global growth fuels demand for commercial space.
Ivy Funds
Diane Coe Dercher, Senior Vice President and Chief
Economist at Waddell & Reed, and Joseph Betlej,
portfolio manager of Ivy Real Estate Securities Fund,
discuss the current property market and securities
environment for the residential and commercial real
estate sectors.
How bad is the current downturn in the
U.S. housing market? How much longer is it likely to continue, and what is
the broader impact on the U.S. economy as a whole?
Dercher: America’s
inventory of unsold homes is up sharply. Sales and prices are down for
both new and existing homes. Many homes have also been taken off the
market by discouraged sellers. In fact, America at the end of the third
quarter had more than 17 million vacant homes – up about 3 million since
the end of the last recession (a five-year period that saw about 9 million
units added to America’s housing stock in aggregate). Negative sales
trends and prices, which began at the end of 2006, do not appear to be
abating, indicating we are in a very serious recession in residential
housing. My expectation is for another few quarters of further decline.
From the perspective of total U.S. housing activity, the
situation is worrisome. Sales volume and housing starts have retreated to
levels we last saw in the mid-1990s, well after the 1990-1991 recession.
This has occurred even as long-term interest rates have remained
significantly lower than during 1990s, and unemployment remains below 5
percent.
Through the second quarter of 2007, we still saw
aggregate, though very sluggish, growth in consumers’ overall housing
net worth (total equity/market value minus total outstanding mortgage
debt). We suspect by the end of this year we will see this line move
negative as the drop in prices of houses that have sold gets fully
reflected in the market value of overall housing assets. Put another way,
for many homeowners, housing prices appear to be going down faster than
equity is being built up through the principal portion of monthly mortgage
payments.
On top of that, total non energy-related costs associated
with keeping up a house, relative to household income, have ballooned.
There is a measure compiled by the Federal Reserve called the household
financial obligation ratio that includes mortgage and debt payments as
well as homeowners insurance and property tax as a percent of disposable
income. The latest data point is at 18 percent of disposable income
(second quarter, 2007), a record high. Adding fuel to this fire is that
household energy costs have risen from 4 percent of disposal income a few
years ago to 6 percent currently, with perhaps another big increase on the
way this winter....
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