This spring there have been a flurry of government initiatives to cushion the blow from the subprime mortgage debacle, but are these the correct policies, and will they make a difference? Some optimists say yes, but University of Houston economist Barton Smith says the national housing market’s correction impact upon the overall national economy is far from over and may linger for several years.
“Some regional markets have already experienced declines in home values of more than 20 percent. This has serious consequences not only for those local economies, but also for the nation as a whole,” Smith said. “The consumer will be conspicuously conservative for some time into the future,” he predicted.
Smith, director of the Institute for Regional Forecasting at the University of Houston, addressed more than 1,000 people May 8 at his symposium, “Recession and Real Estate: Links and Disconnects.”
During this year’s real estate-focused program, Smith compared the current U.S. experience to that of Japan’s in the early 1990s that led to that Asian country’s infamous “lost decade” of minimal economic growth. He also compared it to the last real estate bust in the U.S., which produced the recession of the ’90s.
Smith suggested the likely scenario that will be played out over the next 24 months will end up somewhere between the moderate impact of the last U.S. experience and the much harsher Japanese experience that impacted that economy for more than 12 years. He also stressed that the nation’s housing markets are suffering from three different maladies: excessive prices, overbuilding and foreclosure rates. While some markets, like California, are being affected by all three, Houston is struggling only with an unusually high foreclosure rate. Local housing prices remain affordable, and the degree of overbuilding within the metropolitan area is still rather modest. Nonetheless, Smith warned Houstonians that the local foreclosure problem and how it is being handled presents a significant risk to the metro area’s prosperity.
“Builders are still building too many homes in an environment when so many properties are being dumped back on the market. Foreclosures are currently selling for almost a 20 percent discount and represent a major competitive threat to new home builders.” Smith said. “Furthermore, the easy credit of just a year ago is gone, making mortgage money much more restricted. That is significantly reducing the number of eligible households in Houston who qualify for home ownership. Builders are going to have to be satisfied with new construction of around 30,000 homes per year, not the near 60,000 units per year built in 2006 and 2007.”
Smith’s economic forecast for Houston indicates a moderately slowing growth rate, but one that still is substantially above the national average.
“Most of Houston’s advantage emanates from the strong energy sector, but this portion of the local economy is also slightly down somewhat. He emphasized that all real estate markets in Houston will greatly depend upon the health of the energy economy, since the non-energy sectors will limp along with the national economy. “I expect another relatively good year out of upstream energy, but keep an eye on exploration activity as indicated by such statistics as the national and international rig count. Watch for a sudden slump in energy prices. Look for a leveling off in energy-related employment. These statistics will provide an early warning to developers to lower their sails even more,” he advised.
What worries Smith the most is the lack of foresight by policy makers.
“The ultimate solution to what ails us is to transform our national economy from a consumption-driven economy to an investment-driven economy. Spending beyond our means got us into this mess, and more of the same will not get us out,” Smith said. Instead, Smith outlines an alternative economic strategy that stresses savings and reducing the federal deficit, which, in turn, will lower the trade deficit and greatly reduce foreign borrowing. Smith suggested that, while today’s short-term pains are real, we, the United States, must look for long-term policy solutions, not quick fixes. Otherwise, the country risks finding ourselves in the same predicament the Japanese struggled with throughout the entire ’90s. Furthermore, he argues that were the latter to occur, it would be at the worst of all times when the nation is about to be inundated with retirees, lowering the worker-to-population ratio.
“Cushioning Americans from the worst of the immediate pain is a laudable goal,” Smith says. “But failing to address the deep seated underlying deficiencies in the U.S. economy would be a terrible mistake.” Smith has conducted numerous studies in urban, housing, transportation and environmental economics. For nearly two decades, he has gained increasing national and local recognition for his analyses of the Houston economy and real estate markets. Smith wrote “Handbook on the Houston Economy” and continues to publish two symposium reports a year about Houston’s economy and real estate markets.
For more information about the Institute for Regional Forecasting, see http://www.uh.edu/irf/.
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