The nation’s economy is five years into a 10-year recovery cycle, according to Douglas Duncan, Fannie Mae chief economist and vice president.
National housing prices have another 3 percent left to fall, excluding distressed sales, and could fall another 7 percent altogether, he said, speaking at the annual real estate conference held by the University of San Diego's Burnham-Moores Center for Real Estate.
The housing market's problem is too much supply, much of which is comprised of distressed properties, and too little demand. The lack of demand is driven not only by the nation’s stubbornly high unemployment rate, but also the lack of movement in wages of those that are employed.
Together, those factors have influenced on-the-fence buyers to decide there's no motivation to move right now, while others aren't in a position to enter the market in the first place.
In addition to the 8.6 percent of the population that’s currently unemployed, there’s another 26 percent who fear for their job security, according to a survey conducted by Fannie Mae, cited by Duncan. That means more than a third of the country is unsure of their immediate earnings prospects.
“Employment is the most important factor in my belief system in how you understand real estate,” he said.
In Fannie Mae’s surveys, the nation’s would-be homebuyers have expressed apprehension about taking on a new mortgage.
“They say it’s a great time to buy a house, just not a great time for 'me' to buy a house,” Duncan said.
Ten percent of respondents said it was a good time to sell a home.
According to Duncan, the economy is five years into a 10-year adjustment that began in September 2006, when HSBC announced a $9 billion write-down relating to its subprime investments, introducing broad capital markets to the subprime crisis.
Since then, in addition to the deleveraging of businesses and households and other aspects of the recovery, the economy still needs to adjust to the more than 300 rules set forth by the Dodd Frank Act, less than half of which have been written yet, let alone implemented.
After next year’s election, reformation awaits the secondary mortgage market and the dispositions of the Federal Housing Administration, Fannie Mae and Freddie Mac. Then the market will need to adjust to whatever final shape those entities take.
He said there were currently 4.5 million loans that are more than three payments overdo, and most of those are destined to eventually fail.
All of that should take at least five years, according to Duncan.
“This transition is a return to the old normal, not a new normal,” he said.
The process itself, Duncan said, is to be expected following an economic event like the housing bubble.
“It was a classic asset bubble,” he said. “The reversal is both painful and time consuming.”
But that explanation isn’t likely to gain much traction in Washington, he said. Telling people to be patient, to deal with the pain isn’t a winning campaign strategy.
One characteristic of that return to the old normal is the relationship between renting and home ownership.
In the years between 1995 and 2005, the nation had a net-gain of zero new renters. Multifamily housing construction, logically, remained flat in those years.
While that shift toward renting has hurt demand in the for-sale market, Duncan said the direction of the change is toward historic norms.
Additionally, would-be buyers are concerned with the uncertainties of a between $500 billion and $700 billion net effect on taxes in the next two years. Tax provisions are scheduled to expire on Dec. 31 of both this and next year, and new taxes created in the Affordable Care Act are scheduled to go into effect on Jan. 1, 2014.
“The public is a lot more intuitively engaged than Washington realizes,” Duncan said.
Fannie Mae asked survey respondents if they thought the country was going in the right direction, and found a 6 percent jump in those answering in the negative during July of this year, when Washington was embroiled in the debt ceiling debate.
Three in four people now say the economy is headed in the wrong direction.
While those realities lead Duncan to conclude that it’s difficult to find evidence to expect for robust economic growth anytime soon, he did say, by way of a silver lining, that the country’s demographic trends lead him to believe that real estate will hold a positive position in the long-term.
He projects that the “home ownership ladder,” the period of the average person’s life spent as a homeowner, has been shifted backwards, driven by young people purchasing their first home later, but also older people remaining within their homes longer.
Still, he said he expected the home-ownership rate to bottom out at 65 percent. If increased debt burdens from student loans create a gap between baby boomers exiting the home-owning ladder and their children from entering it, that number could end up as low as 63 percent.
There are currently 60,000 finished, new homes on the market, the lowest level since World War II. The country’s population is currently two-and-a-half times greater than it was at that period.
Duncan said it will be until 2015 before new home creation again becomes equal to population growth plus replacement, the break-even level.
* Related video: Fannie Mae's Douglas Duncan offers 2012 outlook