Seeing ahead in 2009

So with a new year upon us, does he think the current housing downturn is due to end soon, or extend well into a third year?

Maybe.

The outlook for real estate is so foggy that not even a smart guy such as Case - who has studied past housing downturns so extensively he's identified three indicators that signal a rebound - wants to venture a guess.

"This is absolutely uncharted water," Case said. He said the complex nature of the current recession and global credit crunch, mixed with the particular problems brought on by huge numbers of foreclosures, make it difficult to predict where the housing market is headed, other than further downward.

That is not great news for prospective sellers and the professionals who make money helping them sell their homes. Falling prices, of course, are good for buyers, especially in an expensive market such as Massachusetts. Many who were priced out during the last boom are now finding homes much more affordable.

Unless . . .

Unless you can't get a mortgage, because of greater lending restrictions imposed after the credit and subprime mortgage debacles.

Unless you're also trying to sell a home, especially one bought during a market peak.

Buyers can be affected in other ways, too. A weak market prompts many would-be sellers to wait on the sidelines, which reduces the number of choices available to buyers, especially of nicer homes. If you have to buy now, you may wind up settling for less than what you want.

For the record, Case thinks that without more efforts by the federal government and the financial sector, home sales and prices may continue to slide right through 2009.

"Unless the credit crunch gets eased and we get some more of these foreclosures resolved more quickly, it could be another year."

And he is by no means a pessimist - compared with others.

Martin Feldstein, a Harvard economics professor, recently argued the nation should brace for another 15 percent drop in prices - and possibly much more.

Meanwhile, Alan Clayton-Matthews, a University of Massachusetts economist, predicts a 10 percent drop - at most - in house prices through 2009, with the market not hitting bottom until sometime in 2010. By his math, that would reduce the median price of a single-family home, now at a seasonally adjusted level of about $300,000, to around $270,000.

"There is a likelihood that price declines will overshoot because of the psychology in the market and the core job situation," Clayton-Matthews said. "Prices could decline below their fundamental values."

On the flip side, economist Nicholas Perna, a veteran of the financial services industry, argued there are economic trends that could bolster the faltering housing market. He said the recession may come to end by mid-2009, and would possibly be accompanied by an improvement in the stock market.

Those developments could be enough to boost morale to the point where many more home shoppers feel it is safe to buy a house again. The economy doesn't have to shift back into boom mode for this to happen, Perna said.

"You don't need everything to stabilize before people go out and buy homes or else nothing would ever happen," Perna said. "If the stock market is turning around, you will have some pick up in consumer confidence."

The odd thing, by Case's reckoning, is that we should already have seen evidence of a rebound - if what happened in past downturns is any indication. In his studies, Case has identified a trio of key markers that signal when the market has bottomed out and is primed for a rebound: when starts of new housing fall below 1 million a year, when the real estate portion of the nation's economy falls to the 3.5 percent range, and when the ratio of home prices to buyers' incomes settles to more affordable levels.

As to the first one, housing starts fell below the 1 million mark a year ago and are still falling. Secondly, as a percent of the total economy, real estate is down to just 3 percent. And in the Boston area, the ratio of home prices to per capita income hit 10 to1 in early 2008, down from a high of 12 to 1 during the last boom.

So here we are with all three of Case's indicators shifting from red to green, and yet there is no sign the market is turning the corner.

"If the current decline were like past declines, the bottom would be in sight," Case writes. "It is not."

In a recent academic paper on the issue, Case puts the blame in part on the ongoing epidemic of foreclosures, which continues to flood the market with dirt-cheap inventory that pressures prices for all homes downward.

One wild card is mortgage rates. The rally in the bond market toward ultra-safe US Treasuries and the Federal Reserve Bank's campaign of cheap money have pushed mortgage rates down toward the 5 percent mark. Some politicians and interest groups in Washington are also arguing that as part of its efforts to revive the economy the federal government should support mortgage programs that would drive rates down as low as 4.5 percent.

Mortgage rates last plunged to such levels in 2003, when they briefly hit 4.6 percent. That decline helped ignite the last real estate boom, and a refinancing spree that increased consumer spending, and could work again to reenergize the housing market now, Case indicated.

"We really blew the doors off the housing market in 2003, 2004, and 2005," Case said. "When existing sales and production start to pick up, when housing starts pick up, you know it has hit bottom."