Economy's out of immediate danger, but expect slow going in 2012, says Fed economist
This article first appeared in the St. Louis Beacon, Jan. 15, 2012 - Come June, the Great Recession will have officially been over for three years, but the nation's housing hangover looks like it's going to linger for a spell.
Some recently reported symptoms:
- U.S. home prices fell for the second straight month in October, according to the S&P/Case-Shiller index released in December. Prices dropped in 19 of the 20 cities included in the index.
- Year-to-date home sales were down 4 percent in St. Louis in November compared to the same period in 2010, according to the Federal Reserve's Jan. 11 Beige Book. Permits for single-family housing permits decreased by 21 percent.
- Foreclosures nationwide dropped significantly in 2011, but the reason was the "dysfunctional" process -- documentation and legal issues that plagued the industry, according to a Jan. 12 report by RealtyTrac, an online company that tracks foreclosures. The total number of U.S. foreclosure filings in 2011 was 2,698,967 on just under 1.9 million properties, and those numbers are expected to jump in 2012.
If there is a bright spot, it might be in the market differentiations that are beginning to show up -- a shift from 2008 when house prices were down across the board, says economist William Emmons of the St. Louis Federal Reserve.
"You can go back to the boom times; everything was going up in terms of house prices and building activity. Different areas peaked at different times, but by 2008 everything was going down and that was true through 2009. You can make the argument now that some of the bad areas still look awful and are getting worse -- and some areas are starting to stabilize,'' said Emmons.
Emmons cites a combination of reasons for these differences: The degree of the housing bust varied geographically, and the length of the foreclosure process differs widely in judicial and nonjudicial states. In general, the foreclosure process is longer in judicial states, such as Illinois, that require court action to foreclose on a home. Missouri is a nonjudicial state.
Emmons, who was sharing his own viewpoint and not speaking for the Fed, said he often shows a map of mortgage delinquencies in the St. Louis region when he makes presentations about foreclosure to groups in the area.
"The Mississippi River is the dividing line. On the Illinois side, there's a higher level of delinquency and distress,'' he said. "It's not because the local economies are that different, but in Illinois everything takes longer.''
For a more extreme example, he points to Florida, a judicial state, and California, primarily a nonjudicial state.
"They both had extreme booms, and they've had huge declines in house prices. In 2006 they looked the same: no foreclosures. In 2009 they looked the same: a huge increase in foreclosures. But by late last year you could start to see a difference. California had much less evidence of bottled-up problems and Florida is still as bad as it always was,'' he said. "I think it's going to be 10 years for Florida to get through this. They were in an extreme cycle anyway, and the foreclosure process is so overburdened.''
Emmons notes that differentiations are also becoming more evident within metropolitan areas. The aftermath of foreclosures in St. Charles County, for example, is far different than in some of the hardest-hit neighborhoods in north St. Louis, where defaults on sub-prime mortgages started as far back as 2005 and 2006 -- before the recession and house price decline.
Boom and Bust in St. Louis
The housing boom and bust were tempered in St. Louis, Emmons said, but he believes a long-term regional effect will be the slowing -- or even reversal -- of urban sprawl.
On one hand, prices here weren't as inflated as in other regions, but that's partly because St. Louisans kept building new homes on readily available land in outlying communities.
"The good news is we didn't have the crazy boom. But the bad news is we're not that strong of a region in terms of growth potential, so a little bit of overbuilding goes a long way here. That's the issue with prices here: We don't have a lot of job growth. Second, we do have an inventory problem," he said.
In densely populated cities such as Boston or Chicago, new building in desirable areas is limited by space. So demand, supported by available credit, tends to drive up the prices of existing housing stock, Emmons said.
"In our area we have a more elastic supply curve so as demand goes up, prices go up a little bit, but the quantity of houses also goes up,'' he said.
The housing bust initially harmed economically disadvantaged communities in St. Louis that were already vulnerable before the bubble burst. But middle-income communities in outlying counties have also seen the bottoms fall out of their markets, as buyers grow increasingly unwilling to drive long distances to buy bigger homes for their bucks. And home prices have also come down in communities closer to the urban center.
"Some want to live way out, but some were there because they thought they could get more house,'' Emmons said. "And gas prices were cheap and they were willing to drive 50 miles, 40 miles, 30 miles. The economics have changed. Gas prices were up, they were down, now they're back up, and this feeding on itself dynamism of the boom is gone. There's not much job growth of any kind, so I think for new people moving in -- they would have gone 50 [miles], now they're going 40. Now they're going 30. Now they're going 20."
Because of unemployment and the lack of job growth, the market did not absorb the expansion of the housing stock in outlying counties, such as St. Charles, Warren, Lincoln and Jefferson, said Emmons. He believes the fallout, in some cases, will send economic shock waves through the region "from the outside in."
He adds that prices in the desirable urban core have remained more resilient throughout the downturn.
"It seems kind of unfair, if you will, that the low- and middle-income folks who were reaching -- who went out to Warren County -- they're the ones who are going to get hurt, not the high-income people who were buying in the core,'' he added.
More Slow Going in 2012
In terms of the broader financial picture, Emmons suggests that the global financial crisis has passed its acute phase and has evolved into what he terms "low-grade financial distress.''
"Using a medical analogy, you're out of danger of dying, but you still have a fever. Your body is still not back to normal,'' he said. "We have millions of households still struggling with the financial aspect of this [economic] cycle, and of course unemployment compounds that. But even if we get job growth going again, I don't think that would solve it for everybody.''
House prices have fallen so far -- and demand has so changed so much -- that Emmons doubts that some markets will be unable to return to pre-recession levels.
"That's the low-grade financial distress. It's not going to get the Treasury Department or the Fed riding to the rescue,'' he said. "And our ability to resist other shocks -- suppose the European problems spill over and frighten us again -- we're in less good shape than we were before. I think economists now have a better understanding that this is not a normal cycle. We didn't get the rebound that you would have expected after a deep recession.''
Emmons agrees with economic assessments that suggest slow economic growth in 2012 of around 2 percent, as forecasters have downsized the more positive jobs and housing numbers they projected in recent years.
"Every year, we've forecast housing starts to be much stronger than they turned out to be. Why is that? Because people don't understand the economy we're in. This shock hit and that shock hit, but there was an endless procession of shocks. Maybe the economy is just not growing the way it used to. I think the Fed forecast is in the 2 to 2.5 percent range, which is disappointing for this point after a deep recession,'' he said.
Emmons believes that Americans have yet to take a hard look at the financial factors that fed the economic collapse, including the reliance on consumer spending and housing for the nation's long-term economic growth.
"That was not a good idea,'' he said. "That was not a sound long-term growth strategy -- to generate long-term economic growth based on people borrowing money to buy Hummers and McMansions.''