Harvard Study Paints Bleak Housing Picture

Cambridge, MA, June 23, 2008--A Harvard University study says the United States is caught in a real estate market downturn “that is shaping up to be the worst in a generation.”

The decline in housing construction and home sales “already rivals the worst downturns in the post World War II era,” said the report from Harvard's Joint Center for Housing Studies. Price drops and mortgage failures “are the worst on records that date back to the 1960s and 1970s.”

Nicolas Retsinas, director of the center, said formerly hot housing markets saw prices rise to unsustainable levels in the first half of the decade, as lenders relied increasingly on adjustable-rate subprime loans to keep buyers in the marketplace.

“There was almost a kind of steroid quality to lending products,” Retsinas said. “Those products are no longer available and the market is going through withdrawal.”

The result of high prices and weak underwriting standards was a surge in foreclosures, followed by a credit crunch that prevented many distressed borrowers from refinancing. So far the government and the lending industry haven't been able to come to grips with the problem, the report said.

Mark Zandi, chief economist for Moody's Economy.com, said the current housing downturn the worst in the United States since the Great Depression and that it will take at least another year nationwide to work through all the problems in the market.

“In some parts of the country, the market will remain depressed well into the next decade," Zandi said. "It is going to be a slog.”

Because of the slowing U.S. economy, consumers reining in spending, the Harvard report said.

The five sharpest drops in metropolitan area building permitting from 2005 to 2007 were in Florida. Florida tops the list of states with the deepest cutbacks at 64 percent, followed by Michigan at 61 percent and Minnesota at 51 percent.

Although the report predicts an eventual rebound of the housing market, Retsinas says he's uncertain when that may occur.

“It will vary place to place,” he said. “You are more likely to see an earlier bottoming out in areas that didn't see overbuilding, like the Northeast. It will probably be in 2009 there. In other places, like Southern California, I think you are looking at 2010.”