When Will It End?

This is no ordinary housing cycle—that much should be clear by now. Typically, weak economic conditions coincide with a housing downturn. And while job and economic growth has slowed, the economy is not (yet) in recession.

Though the stock market continues to boom, our experts see housing's problems spilling over into the larger economy. While housing may yet drag the rest of the economy down with it—some mortgage-backed securities and hedge funds are already going belly-up—our analysts peg the chances of a recession between 25 percent and 40 percent. Analysts outside the industry say the odds for recession are on the rise. A Wall Street Journal poll of 52 economists conducted in September projected the likelihood of a recession at 36 percent, up from 28 percent in August.

Inventory is so far outside historical norms, several experts say there is no comparing it to past cycles, that we are in uncharted territory. You can thank the now-burst credit bubble for that. When the Federal Reserve kept lowering the Fed Funds target rate, and lenders started loosening lending standards, they pulled years of demand forward.

“We did five years of demand in three years,” says Shulman.

Americans who might be thinking about buying homes as prices fall and they see relatively good bargains already bought homes at market-topping prices and are stuck with homes declining in value and mortgages they can't afford. The buyers that usually pull housing out of its funk are simply not there, despite Yun's claim that “there is clearly a pent-up demand.”

So get your spoons out, pour that medicine, and swallow hard. There is too much inventory to burn through and starts have been too high, continuing into 2007. Beyond that, the credit situation is far from worked out—though regulators proposed tougher guidelines for lending and both states and the federal government plan to act against predatory lenders—and Federal Reserve Chairman Ben Bernanke promised Congress in July that the Fed would be reviewing “a wide range” of mortgage lending practices and hoped to propose new rules by the end of 2007.

SOURCE: THE WALL STREET JOURNAL

In the short-run, tougher lending standards will hurt housing demand further, but in the long-run, it works in housing's best interest. Less demand now means more demand later.

There is so much lining up against a quick housing recovery that the earliest Builder can see it happening is 2009, and more likely not until 2010. If the housing market's problems with credit spill over to the overall economy to a greater degree, dragging down job growth (as construction continues to slow, so will job growth), consumer spending (therefore weakening economic growth), and this housing recession turns into an economic recession before housing has rebounded, it will be many years before home sales pick up and pricing power returns to the hands of builders.

It was a seller's market for so long, now it is the buyer's turn. And right now, there are too few of them, and those that are there are waiting for the bottom in home prices to hit. Why buy now when you can wait a bit and pay $100,000 less?

But the bottom is coming and will hit in late 2008 or early 2009, followed by a period of dragging along the floor. No recovery until 2009 or 2010. And after all we heard, that still may be optimistic.

“If you were walking along at night, and you fell into a hole, and you hit the dirt, that's when you're at the bottom,” Vitner says. “Then you have to find a way to get out of the hole. Well, housing still hasn't hit the dirt. When it hits the bottom, then we still have to climb out of the hole. We're not going to feel a whole lot better until we're out of that hole.”

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