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Getting the Story Right on What Housing Recovery Looks Like

Anthony Randazzo
August 30, 2011, 3:31pm

Perhaps we should not fault journalists for their reporting mistakes on the economy when it comes to technicalities—most do not have any background in the topics they cover. But some do, like the reporters for MortgageServicingNews or HousingWire. Their job is to cover the industry and so they should be held to a higher standard when it comes to writing stories about the housing industry. One persistent frustration I have is when I read articles that seem to be unaware of the new universe we live in. Take this sentence from last Friday in a MortgageServicingNews story about the shadow inventory for example:

But even over a slightly shorter period, the lingering glut of homes in foreclosure threatens to further depress home prices and postpone a recovery.

Okay, what's wrong with this sentence? Leading up to this the writer noted that S&P lowered its estimate for the time it'll take to work out the shadow inventory from 52 months to 47 months. That is still basically four years, unfortunately, and so the good news should be taken with a grain of salt. That is when the MSN reporter noted that 47 months is just a "slightly shorter period" and that this would still threaten "to further depress home prices and postpone a recovery." (Emphasis added.)

The problem is that those last two clauses don't line up. Yes, the shadow inventory may be smaller. And, yes, this means housing prices will still feel downward pressure for a while. But that does not mean the "recovery" will be postponed.

What will the recovery look like? Should we be trying to get back to housing prices as they were at the peak of the bubble? By my estimation using inflation adjusted Case-Shiller numbers updated today reflecting the second quarter of 2011, we need housing prices to fall another 6.6% to 9.5% in order to be back on the historical trend for housing prices and clear of the bubble (and that doesn't take into account that housing subsidies have long skewed housing prices so the historical trend is unlikely where the real price of housing should be anyway). Of course, prices may actual wind up swinging past that point in order to clear out the excess supply in the system before swinging back up to equilibrium. 

When housing prices are back within range of a historical norm (which we've noted previously is a remarkably flat line since World War II), and the shadow inventory worked out, and the foreclosure pipelines cleared—then we will be in recovery. In fact, you could consider this whole process recovery, given that we are recovering from a housing bubble goosed by loose money policy, poorly aligned incentives for financial firms, and a glut of housing subsidies ala Fannie, Freddie, and HUD. 

Sadly, even if all this occurs, if we don't radically reform American housing policy, get rid of the subsidy system, put Fannie and Freddie on a path to be wound down, let the private sector back into the housing finance market, and in general stop federal policies that see homeownership as an inherent good for all in and of itself, we will be back in this mess down the road. This is the new reality that all should be waking up to, especially those journalists covering the industry.


Anthony Randazzo is Director of Economic Research


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