Son 2009

Jn Cener fr Husn Sudes f Hrvrd Unversy

THE STATE OF THE

NatioN’SHoUSiNg

2009

grdue Schl f Desn|Hrvrd Kennedy SchlPrncpl fundn fr hs repr ws prvded by he Frd Fundnnd he Plcy advsry Brd f he Jn Cener fr Husn Sudes.addnl suppr ws prvded by:

Federl Hme Ln BnksFredde McHusn asssnce CunclNnl asscn f Hme BuldersNnl asscn f Husn nd Redevelpmen offclsNnl asscn f Lcl Husn Fnnce aencesNnl asscn f Relrs

®

Nnl Cuncl f Se Husn aencesNnl Husn CnferenceNnl Husn EndwmenNnl Leue f CesNnl Lw incme Husn ClnNnl Mul Husn CunclReserch insue fr Husn amercUned Ses Cnference f Myrs

The State of the Nation’s Housing 2009

d n necessrlyrepresen he vews f Hrvrd Unversy, he Plcy advsry Brd f he Jn Cenerfr Husn Sudes, he Frd Fundn, r he her spnsrn ences.

Jn Cener fr Husn Sudes f Hrvrd Unversy

Executive Summary

Joint Center for Housing Studies of Harvard University1

1

Despite unprecedentedfederal efforts to jumpstartthe economy and helphomeowners keep up withtheir mortgage payments,home prices continued to falland foreclosures continuedto mount in most areas throughthe first quarter of 2009. Whilenew and existing home salesand single-family starts haveshown some signs of stabilizing,ongoing job losses, houseprice deflation, and tightermortgage credit are placingany recovery at risk.

In the worst housing construction cycle since the 1940s

(Figure 1),

depressed demand is making it difficult for the market to workoff excess vacant units. Restoring demand to more normal levelswill take time since so many owners are in financial distress ortrapped in homes worth less than their mortgages. The recessionhas also dampened both immigration and new household forma-tion. But once new home sales rebound and the economy beginsto pick up, the aging of the echo boomers—the largest generationto reach adulthood in the nation’s history—should reinvigorate thehousing market.

From Boom to Bust

The seeds of the housing bust were sown during the precedingboom. Following the 2001 recession, a combination of tight hous-ing markets and the lowest mortgage interest rates in nearly 40years sparked rapid house price appreciation. Afraid of missingtheir chance to get in on rising prices, homebuyers flocked to themarket. Speculators looking to earn a quick return also jumped in.Despite rising mortgage interest rates, buyers were able to chasehome prices higher from 2004 to 2006 largely because of changesin lending practices. Lenders were willing to relax downpaymentand debt-to-income requirements. They also offered productsthat lowered initial monthly payments but carried the risk of laterresetting to sharply higher levels. In many cases, lenders did notverify applicants’ incomes and assets. At the same time, borrow-ers who would have previously been denied credit because ofpast repayment problems were able to secure subprime loans,albeit at higher interest rates.Although risks were mounting, loan performance held up as longas rising home prices allowed borrowers to refinance or sell theirway out of a squeeze. But prices began to flatten at the end of2006 in some of the formerly hottest markets and then droppedin an ever-growing number of locations in 2007 and 2008. As aresult, the share of subprime loans entering foreclosure soared