Geoffrey Hewings, the director of the university's Regional Economics Applications Laboratory, is an expert on the real estate market, compiling a monthly home sales forecast for the Illinois Association of Realtors. With the nation mired in its worst housing slump since the late 1980s, Hewings, a professor of economics, geography and urban and regional planning at Illinois, discusses the outlook for home sales in 2011 in an interview with News Bureau reporter Phil Ciciora.
What trends do you see in the national housing market for 2011?
The national housing market seems to be bifurcating into areas that are signaling signs of a recovery and those that appear to be entering a period of continued drops in both sales and prices. Illinois is part of the latter group.
We've seen some green shoots recently - pending home sales rose 10.4 percent in October thanks to low interest rates and good bargains on available houses. Is this the beginning of a recovery, or will the huge inventory of unsold homes continue to hamper the market?
It is very difficult to extrapolate longer-term trends from a few months' observations. Earlier this year, analysts were buoyed by significant growth in sales in the first few months but it turned out to have been stimulated by the Federal Home Buyer Tax Credit. A month or two after the credit expired, housing sales dropped significantly.
Our estimates suggest that the program did little to stimulate a sustained recovery and merely accelerated the purchases of many households. While the U.S. Government Accountability Office claimed that almost 85,000 home sales in Illinois could be attributed to this stimulus, our estimate was that a little more than a quarter of these sales could be seen as additions to what would have occurred during the normal course of events.
Under what circumstances do you foresee another government-sponsored incentive program (that is, a tax credit for first-time home and repeat home buyers) for home sales?
Given the experience with the earlier program, I think that this would not be an effective policy tool. The results of the November elections make it very unlikely that any further stimulus program will be considered.
How does the housing market in Illinois compare with markets in the rest of the country?
Illinois price and sales drops in the last few months have generated concern; according to RealtyTrac, as many as 25 percent of the sales in the third quarter were distressed properties - foreclosure or short-sales. Forecasts suggest that 2011 will witness another wave of foreclosed properties entering the market, especially if the current legal issues surrounding bank-initiated foreclosure proceedings are resolved.
In the last several months, inventories - that is, the time it would take, at current sales rates, for properties to sell - in both the Chicago and Illinois markets have increased to 14 and 13 months, respectively. Forecasts for 2011 suggest continuing erosion in
year-over-year sales for most of the months and a concomitant decline in median prices.
While the housing market provided a significant boon to the economy through 2007, the causality has shifted; absent a sustained economic recovery - especially significant gains in jobs of more than 150,000 per month nationally - there is little prospect that the housing market will recover. Consumers have become more risk averse and are waiting to be convinced that economy recovery will be sustained before venturing into the housing market again.
With existing home prices continuing their year-over-year slide, is real estate still a good investment? Is buying a house still better than renting?
Housing is both a consumption and an investment good; for many people, the latter characteristic dominated their decision-making during the run up in housing prices. The housing assets were often viewed as a private bank with many households leveraging their housing equity to generate the source for consumption spending.
With historically low interest rates and the continued attraction of mortgage interest deductibility, housing is still attractive and may still be very competitive with renting. However, in the short-term, it is unlikely that the housing assets will appreciate at the rates observed prior to 2008 and, in many markets, the reverse may occur.
The decision to purchase will now be dominated by other characteristics of ownership - housing quality, neighborhood attributes and so forth.