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US Housing Slump May Persist for Several More Months


U.S. home prices rose substantially in the early years of this decade but declined in 2006. VOA's Barry Wood reports several experts say the slump is likely to continue through most of this year.

After rising an average 27 percent between 2002 and 2005, prices of existing homes fell two percent in 2006. There is no easy explanation of why the housing market peaked and then corrected.

Long-term interest rate remain at historically low levels, which means that those in the market for a house should find it easy to borrow money.

Ian Morris, chief economist at HSBC Securities in New York, believes housing sales fell because homes became unaffordable.

"What worries me is that valuations still look very excessive. You know, prices are too high relative to income, relative to rents, relative to interest rates," he said. "Even though mortgage rates are still pretty low -- around six percent for a 30 year fixed rate -- that's not bad at all. But house prices are still so high that it is stretching affordability even with such low rates."

Morris believes prices need to drop further and are likely to do so over the coming months.

Morris spoke to Bloomberg Television. The construction industry, in particular, is suffering because of the housing slump. The head of Toll Brothers, a major builder of luxury homes, says the current slowdown in construction is the worst he has seen in 40 years. One of ten U.S. jobs is tied to the housing industry.

Sales and price trends vary considerably according to geographic location. The price rises during the boom years of the early 2000s were highest on the east and west coasts. The biggest price declines have been in Florida and Arizona, retirement areas that attracted considerable speculative investment in real estate.

Pat Coombs, a sales agent in Grand Rapids, Michigan, is the president of the National Association of Realtors. She says with interest rates low and prices down, this is a terrific time to buy a home.

"I think our message is very valid in that it is a great time to buy, [there's] a great amount of inventory, and interest rates are historically low," said Coombs.

Coombs says that the housing market in Michigan has been in decline for three years, mainly because of a slump in the U.S. car industry.

She said, "In Grand Rapids we have seen the decline in the auto industry on the other side of the state [Detroit] and, you know, the job market is gone. So therefore, there is no demand."

Critics of the U.S. central bank say the Federal Reserve set off a speculative bubble in housing by pushing interest rates to 40 year lows in the aftermath of the 9-11 attacks and the 2001 recession. They say the drop in interest rates prompted many investors to shift assets out the stock market into housing.

In spite of the slump in housing, the U.S. economy is still creating jobs with economic growth continuing at an annual pace of more than two percent.

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