Happier New Year? In all likelihood 2008 will be

Happier New Year? In all likelihood 2008 will be
Kenneth R. Harney, Washington Post Writers Group
December 30, 2007
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WASHINGTON - Queen Elizabeth II once famously referred to her "annus horribilis," a year in which almost everything went wrong, from family scandals to a fire that destroyed parts of Windsor Castle.The American housing market experienced its own annus horribilis in 2007, a year when all the sins and excesses of the prior six were visited upon nearly everyone in the system:*Homeowners lost $160 billion in net equity in their homes from the first quarter of 2007 through the third, according to the latest "flow of funds" data from the Federal Reserve. Homeowners' equity stakes, their property value less their mortgage balances, dropped to 50.4 percent, from 56.1 percent as recently as 2002.
Both numbers could be worse in the Fed's fourth-quarter survey.*Foreclosures on single-family homes hit 1.69 percent in the third quarter, the worst in decades, and 5.6 percent of all home mortgages in the country were delinquent by 30 days or more.One out of five subprime adjustable-rate loans nationwide was delinquent by the end of the third quarter, and the proportion was higher in a handful of states: 26.2 percent in Michigan and nearly 23 percent in Massachusetts.*Home sales tanked in almost every local market that had seen hyperinflation in prices in the boom years of 2001 to 2005. Local declines in excess of 50 percent year-to-year are not unusual in parts of California, Florida, Nevada and Arizona.In many of the same markets the sales booms had been propelled by speculative investors looking for quick payoffs. Now one-quarter of new foreclosures in California, Arizona and Nevada involve flippers sending back the keys.* The national inventory of unsold houses jumped to 10.8 months, a level that even the most optimistic economists concede is a drag on the overall market.*Job losses in housing and mortgage-related industries have been staggering, into the hundreds of thousands by some estimates, and extend to the highest executive ranks of Wall Street's and banking's most prominent firms. When you lose billions on dumb bets on subprime mortgage securities, you can also lose your head.Everybody knows these tales of woe -- and more. It's been a lousy year. Could 2008 be better?I think the odds are reasonable that it will. Here's why: Through the grimmest headlines of 2007, a number of positive underlying economic forces kept real estate from being a true bust. If those forces continue, they should help cut the time needed for the correction cycle to bottom out and the inevitable recovery to begin.Take mortgage rates. Had the cost of money been significantly higher in 2006 and 2007, delinquencies and foreclosures stemming from the toxic mixes of subprime loans would have been much worse.But the 30-year fixed rates that hovered in the low 6 percent range for much of the year -- even in the high 5s for a couple of weeks -- allowed many borrowers to refinance into alternatives such as FHA or conventional Fannie Mae/Freddie Mac loans. The recently announced national loan modification and rate-freeze should keep at least some struggling subprime borrowers out of foreclosure.Steady, moderate national growth of jobs, economic expansion and low inflation also helped the housing market in 2007 and could continue to do so. By the way, despite all the scary statistics, sales of existing and new homes in 2007 totaled an estimated 6.5 million, which would make it the fifth-largest sales year in American real estate history.Another fact that often got lost in the bad news in 2007 and offers reason for hope: Vast swaths of the country never experienced the excesses of the boom years and have not endured the pains of the crunch in the most volatile markets.The latest federal quarterly home-price data from the Office of Housing Enterprise Oversight found that while significant declines have occurred in dozens of speculative markets, prices were flat or up in 204 of the 287 metro areas surveyed.At some point in every correction cycle, even in the most depressed markets, consumer psychology begins to change. People who need or want houses look around, see lower prices, affordable financing and say: Hey, this is a smart time to buy. The cycle has done its work.It won't be everywhere, but that psychology should begin taking hold in a growing number of markets in 2008.