Housing Story Still
Has Many Chapters
August 25, 2008; Page C1

Children born when the housing-market collapse began have since learned to walk and talk and eat with utensils. By the time it is over, they probably will be reading and writing.

This week brings several key gauges of housing, and they are mostly expected to keep moving in the wrong direction. Monday, the National Association of Realtors reports July sales of pre-owned homes. Tuesday, the Commerce Department reports on new-home sales in July. Economists think resales rose a bit and new-home sales fell from June. The S&P/Case-Shiller home-price index for June also is due Tuesday. That likely fell 16.5% from a year earlier, according to Wall Street estimates.

These reports lately have offered some hope that the end of the housing debacle, which started when home prices peaked in late 2005, might finally be near. Sales seem to have flattened. A handful of cities enjoyed price increases in May.

But there are at least three keys to how much longer this mess will drag on, and none points to an early rebound.

First are mortgage rates. Affordability has fallen as rates have risen in recent months, delaying housing's recovery.

"Our initial assumption had been that things would stabilize as we got into the first part of next year," says Morgan Stanley economist Ted Wieseman. "This big backup in mortgage rates puts that at significant risk."

Resolving the Fannie Mae/Freddie Mac conundrum could help. As long as the government-sponsored entities are ailing, it is harder for them to buy mortgages cheaply. That is pushing rates higher.

But even if borrowing costs fall, the market faces a second hurdle: the credit crunch. Banks, trying to fix the balance-sheet damage already done by housing, are getting stingier with lending -- particularly to home buyers, the source of their miseries.

"That's typical of any credit cycle: When things get out of whack in one direction, they overcompensate in the other," says Joshua Shapiro, chief U.S. economist at MFR. He expects sales to bottom in mid-2009 and sees no price recovery coming until six to 12 months after that.

Finally, there are still too many houses on the market. At the latest sales pace, there were about 11 months of existing homes available in June. Normally, that number is about six.

Plunging home construction should help. But there are still untold numbers of houses being held off the market by wary sellers. There are millions of foreclosures and other bank-owned properties not yet available.

And many recent sales have been bulk purchases of bank-owned properties by speculators, says Ivy Zelman, chief executive of housing researcher Zelman & Associates. At the first thaw, they will dump those houses back on the market, pushing prices down.

Ms. Zelman sees no price bottom until 2010 at the earliest and expects prices to be flat for two years after that. Other economists are more optimistic, expecting a bottom in late 2009.