Opening with the proviso that the length and depth of the current housing "correction" will depend on employment growth and interest rates, the Joint Center for Housing Studies of Harvard University's annual report, "The State of the Nation's Housing 2007," finds the longterm outlook is more "upbeat."

Sounding a lot like the NAR's former chief economist David Lereah, the Joint Center predicts a continuing boom in the number of U.S. households. "Thanks in large part to recent immigrants and their native-born children, household growth between 2005 and 2015 should exceed the strong 12.6 million net increase in 1995-2005 by some 2.0 million." Immigration will hit all-time records between 2005-2015. Already foreign-born homebuyers are 14 percent of the market.

But before anyone celebrates, there's still a housing recession occurring, with housing affordability a "pervasive problem" following five years of record-breaking sales and a near-record 2006.

Housing demand got a tailwind from low interest rates, easy loans, and rising prices. In late 2005, says the report, rising mortgage interest rates and higher house prices finally forced out some buyers, and the number of foreclosed homes began to grow. Home prices softened along with demand, eliminating the urgency to buy. Investors dumped inventory on the market, causing builders to pull pack on production. In the fourth quarter of 2006, year-over-year declines in housing permits occurred in 277 metros, while 74 of 148 metros posted drops in nominal median home prices. Vacant homes jumped by over 500,000. Builders were building 2.1 to 2.2 million homes annually, while sustainable demand was closer to 1.9 million.

That means an inventory overhang that should take two years to work off if builders cut production to 1.65 million units annually.

That's only one reason why home prices will soften further, suggests the Joint Center, and the effects have yet to be felt through the economy because homeowners were still able to borrow against rising equity in 2006. Now equity is diminishing and a record-share of adjustable-rate mortgages are resetting to much higher interest rates. Subprime borrowers are more at risk, with the share of "troubled loans" jumping from 6.6 percent to 7.9 percent between the fourth quarters of 2005 and 2006.

Also dragging housing was weak income growth, local restrictions on lower-cost housing development, and restrictive land-use regulations.

What is unknown is the depth and breadth of the housing slowdown and when it will end. "With household growth accelerating, demand for second homes rising, and the housing stock aging" (editor's note: 80 percent of existing stock was built before 1980) new home demand should total about 19.5 million units from 2005 to 2014. To put this into perspective, 18.1 million new homes were added to existing inventories between 1995 and 2004, more than 2 million annually.

That may sound like a discrepancy. Demand says more than 2 million homes annually will be needed by 2014, then why is there a need to work off a 500,000 new home surplus for the next two years? Simple. The crowds aren't here yet, but they will be, especially when the echo-boomers -- the second largest demographic body in history besides the baby boomers start forming households and buying homes.

So, in the meantime, there's a drag on housing that will impact the greater economy. "Slower housing shaved a full percentage point off national economic growth in the latter half of 2006," said the report.

Refinancings for homeowners who took cash out of their homes reached records in 2005 and 2006. Second mortgage debt surpassed $1 trillion in 2006, up from $943 billion in 2005. Capital gains for sellers were $79 billion in 2005, dropping to $70 billion in 2006.

Higher interest rates could mean that homeowners will borrow less against their equity in the immediate years, and discretional spending will weaken.

The positive news is that in most metros, housing prices will "correct" fairly quickly, predicts the center, as the overhand was due to the "market's own excesses," rather than a downturn in employment. For example, the largest downturn in housing prices was in Detroit, where home prices fell over 7.4 percent, but that's also where employment feel the most -- by 2.0 percent.

Rising rents suggest that overall, the market is getting "close to balance."

Published: June 12, 2007

Use of this article without permission is a violation of federal copyright laws.

Blanche is a renowned author of five real estate books. Her newest, Bubbles, Booms and Busts: Make Money In Any Real Estate Market, McGraw-Hill, was rave-reviewed by The New York Times. She was also selected from hundreds of real estate experts to contribute to Donald Trump's book, Trump: The Best Real Estate Advice I Ever Received: 100 Top Experts Share Their Strategies, Rutledge Hill Press, and is featured on page 68. Order Now Review - Honors In 2006, Blanche was selected among scores of candidates to author two consumer real estate guidebooks for the National Association of Realtors: The NAR Guide to Home Buying, and The NAR Guide to Home Selling, Wiley & Sons. She is currently planning two new books for the NAR and its members.       Known for her keen insight into real estate industry issues and for her ability to make complex subjects easy to understand, Blanche is a sought-after keynote and continuing education speaker. Real estate organizations from MLSs, to brokerages, to franchisors, to associations hire her to provide up-to-the-minute analysis of real estate industry news and advice on how to improve revenues. Her passionate delivery, peppered with stinging wit, is a huge hit with audiences and fans. Don Klein, CEO Greater Nashville Association of Realtors, Blanche Evans, Richard Courtney, president 2007, GRAR "The GNAR membership meeting last week featured Blanche Evans as the keynote speaker. Her comments and insights resonated extremely well with those in attendance and we have had many requests for copies of her PowerPoint Presentation. She was a terrific part of the membership meeting and convention program!" - Don Klein, CEO Greater Nashville Association of Realtors Coverage from WSMV, Nashville - 8-14-2007 That Interview Guy - Get Inside The Head Of Today's Generation 2007 AE Institute Session - To purchase 2006 AE Institute Session - Parts 1 2 3 4 5 6 7 8 9 HouseValues Mastermind call - Parts 1 2 Blanche's fireside chat with Jeremy Conaway, HAR - Click here. For more articles by Blanche, click here.