real estate

Why the housing crash remains a wreck

House in vise
Highlights
  • Housing activity usually leads an economic recovery. But not this time.
  • Overbuilding and foreclosures have increased the supply of for-sale homes.
  • Unemployment and tight credit have constrained demand to buy homes.

Foreclosures. Short Sales. Unemployment. Tight credit. Overbuilding. Those are but some of the reasons housing markets in many parts of the country remain stubbornly depressed, even while activity in other economic sectors has begun to rebound.

New-home building and sales of existing homes historically have been leading economic indicators, pointing the way to robust recovery after a downturn. In the current cycle, however, that hasn't happened, says Lawrence Yun, chief economist at the National Association of Realtors.

"Housing has always been the leader in terms of getting the economy back on track," Yun says, "but that is not the case this time around."

Housing starts shrivel

The biggest stumbling block has been the sharp downturn in new-home construction, which is usually a major contributor to economic growth not only through new-home sales, but also jobs in home construction and purchases of new appliances, fixtures and furnishings.

But construction starts for residential units fell to an annualized pace of 560,000 units in May, a drop of 3.4 percent compared with the 582,000-unit pace for construction starts set a year earlier, according to the U.S. Census. Sales of new-built homes have lifted from last year's rock-bottom levels, but are still far lower than normal.

Building has been constrained, Yun says, due to a plentiful supply of existing for-sale homes relative to demand, rising prices of building materials such as lumber and steel, and builders' difficulty in getting construction loans.

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The ample inventory of for-sale homes includes an "enormous overhang" of bank-owned properties that depress home prices and present tough competition for builders, says Rick Sharga, senior vice president of RealtyTrac, a foreclosure data firm in Irvine, Calif. Homes that are in some stage of the foreclosure process are so commonplace that they accounted for 28 percent of all homes sold nationwide in the first quarter of this year, RealtyTrac's latest survey showed.

Tight credit squeezes demand

Meanwhile, homebuying has been held back largely due to lenders' tighter grip on mortgage financing. Higher credit scores, fatter down payments and pickier underwriting have combined to outweigh fallen home prices and low interest rates, which have made owning cheaper than renting in some U.S. cities. One indicator of just how tight lending has become: 31 percent of U.S. home sales in April were to all-cash buyers, down only slightly compared with a record-high 35 percent share of cash transactions in March, according to the National Association of Realtors. Most cash buyers are investors who don't intend to occupy the homes they purchase.

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