Oversupply and depressed demand are combining to throw the US housing market into a downward spiral that could derail the broader economic recovery.
Too much building in the boom years and the ensuing bust that pushed many borrowers into foreclosure created a glut of vacant homes that is weighing on the market.
Meanwhile, demand is depressed despite prices falling to levels not seen since 2002, making homes in many regions a bargain.
The census bureau estimates there are 10m vacant homes – about 1.5m more than would be the case in a normal market. Of these, about 2.3m are in foreclosure and 80,000 are being repossessed each month.
If home sales continue at their anaemic pace, it could take five years to work through the backlog, says Mark Zandi, chief economist of Moody’s Analytics.
More important, however, is the effect these distressed properties are having on prices. Distressed homes tend to sell for about 30 per cent less than normally expected.
About a third of all sales now fall into this distressed category, meaning financial difficulties have forced the owner into foreclosure or to put the house up for sale for less than they owe on the mortgage.
Mr Zandi expects the proportion of distressed sales to rise to 40 per cent before peaking in 2012 – meaning they will act as a weight on prices for months, if not years, to come. Meanwhile, buyers are proving reticent. Sales of new and existing homes are running at an annualised rate of about 5.3m, about 1m fewer than would change hands usually, says Mr Zandi.
One of the big pressures behind housing demand – the creation of households by younger people – has greatly eased, because many of these people, who suffered more than average from unemployment during the recession, have moved in with friends and family to save money.
During normal times, about 1.25m households would be created each year, but that figure plunged to 300,000 in 2010 and now stands at 750,000, Mr Zandi points out.
The result is that housing, which would typically help pull the economy out of recession, is instead acting as “a significant weight on growth”.
The stubbornness of the housing crisis is confounding analysts, many of whom predicted the market would stabilise once unemployment began to ease.
“That hasn’t happened,” says Patrick Newport, an economist at IHS Global Insight.
Mr Newport is worried that falling prices will cause buyers to delay purchases, which could push prices even lower. “You could make a great deal and buy a home at a very cheap price, but next year that house could be under water [be worth even less],” he says.
Not all the news from the housing market is grim.
The number of borrowers falling behind on mortgage payments is starting to decline, and home prices in April, the start of the spring selling season, showed their first month-over-month increase since a homebuyers’ tax credit that artificially propped up the market expired last year, according to CoreLogic, a real estate tracking firm.
However, the direction of the housing market is bad enough for some analysts to be calling for renewed government assistance – a move likely to be resisted by the White House and Congress.
In fact, the opposite will happen when limits on government-backed loans drop in September to $650,000 from $729,000 in the highest cost regions, making it more difficult and expensive to get a mortgage.