Why the Housing Crash Remains a Wreck

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% 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.

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% 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% of U.S. home sales in April were to all-cash buyers, down only slightly compared with a record-high 35% 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.

Another demand-depressing factor has been the trend toward young adults living with their parents or an additional roommate, rather than forming their own new households. Household formation traditionally creates demand for smaller or less costly starter homes, the sales of which, in turn, allow current homeowners to buy larger or more expensive residences.

"What we have today is a weak recovery in the labor market, which is holding back some of the household formation," Yun says. "The only way to unleash this household formation is to have strong consistent job growth."

The national unemployment rate stood at 9.1%, or nearly 14 million people, in May. Another 8.5 million people were employed part time, but wanted full-time positions.

Homeownership Loses Appeal

Sharga points to a shift in consumers' attitudes toward homeownership as a factor in the housing sector's weakness: People aren't as interested in buying homes as they used to be. One recent RealtyTrac survey found that a huge percentage of today's renters don't want to buy a home -- ever.

"No one wants to catch that proverbial falling knife (of lower home prices) and no one wants to become the next foreclosure statistic, so it really is an issue," Sharga says.

Like the slower household formation, that lack of homebuying enthusiasm translates to less demand for entry-level houses and less opportunity for current homeowners, who might not have much equity, to trade up to another home.

So what will it take to get housing back in action? In short, a chain reaction of a robust economy, strong job growth and more household formation, easier credit, fewer foreclosures and an absorption of the existing excess supply of for-sale homes.