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- iHaveNet.com: Economy
by Danielle Kurtzleben
Four reasons not to proclaim housing's return
The
Housing Still Far From Healthy
"Even if you look at levels before housing entered into bubble territory, we were still seeing housing starts more than double the level that they're at now," says Conrad DeQuadros, economist at economic consulting firm RDQ Economics. Broadly speaking, annual housing start rates in the late 1990s, before the bubble, hovered between 1.4 million and 1.7 million. Some economists say that reaching that rate again could take three to four years.
Volatile Market, Noisy Data
Overly optimistic predictions of a housing recovery should perhaps be taken with a grain of arithmetical salt. According to Adolfo Laurenti, deputy chief economist at Chicago-based financial services firm
In addition, the
Do We Even Want Many Housing Starts?
"The biggest headwind for the housing sector is the excess supply of housing," says DeQuadros. And when a market is flooded with inventory, adding inventory can be detrimental, he says. "I think if there was a big pickup in housing construction, a lot of that would just go into higher levels of new home supply. That market is competing with the existing-home market." Laurenti agrees. "There is a huge inventory for home sales, in part by current owners," he says. "We have seen very little starts, but we have also seen very little sales. So there are a lot of people on the market who want to sell and cannot." And aside from homes that have for-sale signs on their lawns, Laurenti says there is also the "shadow inventory," made up of people who would like to sell but have given up trying in the current tough market.
Foreclosure Still a Lengthy Process
One factor holding the housing market back from recovery is the slow pace of foreclosures, which means that a backlog of properties is still waiting to move through the market. According to Laurenti, there are two chief reasons for this. One is that banks do not have the capacity to deal with such a large volume of foreclosures: "I think [banks] were not prepared, and they lack the skills and the people to manage the volumes that they have to deal [with]," says Laurenti. "If you look historically, banks are not property management companies and they are not real estate companies. They had very few people who were working in this line of duty, and all of a sudden it's becoming one of the major things they do."
But he adds that there is also potential gain for banks in hanging on to foreclosed homes a bit longer: "The longer they hang on to properties, the higher the hope that sooner or later prices may stabilize and even increase a little bit, and that will give them the opportunity not to lose as much money as they could do if they would move swiftly right now."
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Housing Starts Are Up, but Don't Cheer Just Yet