NCPA - National Center for Policy Analysis

IT IS ONLY GOING TO GET WORSE

July 30, 2008

The housing market crash is far from over, and its ramifications will be with us for some time, says Lawrence B. Lindsey, a visiting scholar at the American Enterprise Institute (AEI).

America has not had a nationwide housing crash since the 1930s.  At one point during that calamity, an estimated 60 percent of all mortgages were in technical default, says Lindsey.  The vacant home problem is just one of the issues in the current crisis:

  • There are 129 million housing units in the United State, comprising owner-occupied, rented and vacant units.
  • Of these, 18.5 million are currently empty, and this number is expected to continue rising.
  • This vacancy rate is 2.5 percentage points higher than it has been at any point in the half century the data has been tracked, which means there are at least 3 million too many empty housing units in the country.

The housing market downturn has dramatically decreased the value of homes across the United States:

  • Home prices are down over 14 percent in the aggregate since their peak in 2006.
  • The pace of decline, about a 30 percent annual rate in recent months, is still accelerating.
  • Future markets are predicting that home prices will fall over 30 percent in aggregate on a national basis, with 70 percent of the drop happening by year's end.
  • Just a 20 percent decline in home prices would place a quarter of mortgages under water.
  • A 30 percent drop in prices would shrink household assets by about $6.5 trillion, which would permanently lower household spending by $200-300 billion.

The combination of excessively easy credit, a rapid run up in prices, and overbuilding set the stage for the current mess, says Lindsey.  Prices must continue to fall to correct oversupply, which will further adversely affect both consumer confidence and financial solvency. 

Source: Lawrence B. Lindsey, "It's Only Going to Get Worse," American Enterprise Institute for Public Policy Research, June 2008.

For text:

http://www.aei.org/article/28076

 

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