Utah’s Housing Crisis?
Thursday, August 7th, 2008It has now been a year since several events confirmed that the U.S. economy was deeply entangled in a housing and mortgage crisis. Typically in many past housing cycles, very high mortgage rates combined with recessionary economic conditions were primary causes of these prior housing problems. In contrast, the current housing meltdown is really an affordability problem precipitated by annual housing price increases double or triple the gains in income. The home price escalation in Utah and elsewhere reflected many factors including: a vibrant economy, low mortgage rates, a significant investor (flipper) demand and over-aggressive lending standards which too often ignored the realities of risk. What has been achieved over the past year, specifically in Utah, to correct the housing disequilibrium?
If the fundamental problem was reduced affordability, either in buying a home or carrying an existing mortgage, a necessary part of the solution is a downward adjustment in home prices. Over the past year, however, a major part of the Utah’s housing adjustment has been a 65 percent plunge in new home construction and, based on average selling prices, a relatively mild 6 to 8 percent decline in home price reductions. The volume of home sales has dropped nearly 35 percent and a significantly large unsold housing inventory remains on the market. As of June, Utah’s construction industry employment had declined by 11,000 jobs below last year. In the second half of 2008, more aggressive home-price reduction (in total, perhaps as much as 20 percent) would accelerate home sales. With Utah’s ongoing population growth, the dramatic cuts in new home construction appear to be excessive. The housing adjustment process can be achieved more rapidly with less damage to the economy if housing sales prices are reduced more rapidly and volume of new, more affordable home construction begins to increase.
posted by Kelly K. Matthews, Executive Vice President & Economist, Wells Fargo Bank, N.A. For more information, please visit www.wellsfargo.com