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This is the third installment of a three-part series (click here for the first and here for the second installments) on how the breakdown in lending standards has forestalled the home building industry's economic recovery. The stories focus on how we got to where we are today, how foreclosures and plummeting property values affect a new community in Indiana, and the analysts' best guesses on when the downturn will end.

The housing downturn will run its course, and sales and pricing power will pick back up eventually. Just do not expect a recovery in 2007 or 2008. It's not happening.

Despite a move in mid-September by the Federal Reserve Board to lower its Federal Funds Target Rate from 5.25 percent to 4.75 percent in an attempt to force interest rates down and home buying activity up, it is now clear that the housing correction still has a long way to go before it peters out. So says former Fed Chairman Alan Greenspan, NAHB Chief Economist Dave Seiders, and Center for American Progress Senior Fellow Christian Weller, as well as a host of other economists and interested observers who sounded off on the housing market's health in the national press during the lead up to the Fed's big Sept. 18 rate-cut announcement.

Though the odds that the economy will fall into recession increased this summer, the most hopeful of the new-home prognosticators still predict that new-home sales will rebound in the middle to later parts of 2008. Others take a darker view, envisioning the market bottoming out in 2008, with at least a year of dragging along the bottom before gradual recovery begins in 2009. And the most pessimistic see no way that the bottom will happen before 2009, with recovery stretching beyond the opening decade of the new millennium. Yes, you read that correctly: no improvement on a sustained basis until 2010 at the earliest.

Oh, and if there's a recession, which looks more and more likely all the time? Push everything back at least two to three more years.

With so many cons and so few pros lining up against housing on our checklist of issues—historically high inventory oversupply, tight money, an affordability crunch, flagging demand, declining home values, foreclosures—it does seem likely that once the market lands with a thud, it will drag itself along the bottom licking its wounds, before a gradual recovery begins.


The one great exception to this dire scenario is that some markets never tanked in the first place, so have no real rebounding to do. So far, that includes the Pacific Northwest, Seattle, Portland, Ore.; Austin, Houston, and San Antonio, Texas; and inland parts of North Carolina, Charlotte and Raleigh. Slow and steady growth, while not as exciting during the boom, means no massive inventory problem (as there is in Miami, for example, with more than three years' worth of condos and still growing) and no, or at least less, pain during the bust. But overbuilding may yet hit these markets, as national home builders are on the move, seeking the few large markets that have not been slammed by the housing recession.

Christopher Cagan, director of research analytics for First American CoreLogic, suggests that the rest of the country is unlikely to see recovery for three or four years. Inventory must be burned through, consumer confidence in housing needs to rebound, and the fallout from exotic mortgage products and loose lending standards needs to be sorted out—meaning more foreclosures to come and more inventory to work off, Cagan says.

Cagan, who published a study on mortgage payment resets this spring, projects that 13 percent of all ARMs taken out between 2004 and 2006 (about 1.1 million loans with a value of $326 billion) will result in foreclosure. The result: about $112 billion of lost equity to lenders and investors.

But eventually, demand will return and the market will come back. It always has and always will, Cagan says. Before that happens, though, markets that saw home values double or more in recent years will see values decline—he expects routine price declines of 5 percent a year for the next three to four years. But that's not the end of the world, he adds.

“This is not a once-in-a-million-years event; this is not Pearl Harbor or 9/11 or the extinction of the dinosaurs. This is the business cycle, and this is the kind of thing that happens,” he says. “The residential real estate business cycle lasts eight to 15 years, depending on the situation. We had our last peak around 1990.”

In other words, we were due for this downturn.