SAN FRANCISCO — It’s clear the recession is here but how deep it goes is still an unknown, said Kenneth T. Rosen, chairman for the Fisher Center for Real Estate & Urban Economics at University of California, Berkeley.

"There is a great risk here. The risk here is that we could have a deep recession," said Rosen, speaking Tuesday during an annual Fisher Center Real Estate Conference in San Francisco.

SAN FRANCISCO — It’s clear the recession is here but how deep it goes is still an unknown, said Kenneth T. Rosen, chairman for the Fisher Center for Real Estate & Urban Economics at University of California, Berkeley.

"There is a great risk here. The risk here is that we could have a deep recession," said Rosen, speaking Tuesday during an annual Fisher Center Real Estate Conference in San Francisco.

In his view, there is a 45 percent chance for a deep recession, which could mean the loss of 4 million jobs and a rise in the unemployment rate to 7 percent.

Rosen gives a 50 percent chance to this recession remaining mild, and a 5 percent chance to a quick recovery.

The bailout of Bear Stearns rattled the nation’s financial nerve centers, and there is still a lot of fear and uncertainty about the state of the economy, Rosen said.

"We were on the verge of a financial crisis like we have not seen since the 1930s," he said of the Federal Reserve’s intervention in trying to save Bear Stearns.

Fed officials are "doing everything they can to keep the system from absolutely collapsing, and I think they’ve been successful." Even so, he said, "We are very close to the edge."

Rosen added, "What we’ve had is at least a temporary respite, but there’s a lot of fragility in the system."

Home prices may take five to seven years to recover in some areas that are more distant from urban centers, he said, while it may take perhaps two years for inner core areas to see a rebound in prices.

As for those homeowners who are losing their homes to foreclosure, Rosen said, "I think 2 million people who bought houses didn’t have the resources to do it and I’m afraid they are going to be renters for some time. We made a mistake — we shouldn’t have let people buy houses, stretch too far, with instruments that were not suitable for them."

Foreclosure properties, including bank-owned properties that were repurchased after a foreclosure process, are expected to account for 25 percent of all home sales this year, said James J. Saccacio, chairman and CEO for foreclosure data company RealtyTrac. The number of REO properties for sale could reach 1 million, he said.

Saccacio, who also spoke at the Tuesday conference, said, "I think this wave in the market caught all of us a little off-guard."

Total U.S. foreclosure filings are expected to grow from about 2.2 million in 2007 to 3.2 million this year, according to RealtyTrac data, and the total number of U.S. properties with foreclosure filings is expected to grow from 1.2 million in 2007 to 1.9 million this year.

Foreclosures are sending shockwaves through the entire housing market, and Bill J. Sumski, managing director for Paladin Pacific LLC and another conference speaker, said that builders have dropped new-home prices substantially in some cases to compete with foreclosure properties.

"I saw a sign: ‘We beat foreclosure pricing,’ " at a new-home development, Sumski said. "It’s unprecedented what we’re seeing out there."

The problem is that home buyers largely stop buying when the market is on its way down, he said. "There is a great fear about making a large purchase right now. The fear is not just of a U.S. recession but a global recession," he said.

Builders are definitely in survival mode, and some will not survive — Sumski noted that some builders have already filed for bankruptcy, with more to come. A couple of national builders have actually offered price guarantees to buyers, he said, that offer to compensate buyers if the price falls further.

And some builders are putting their sales staff through credit training to help coach buyers in how to improve their credit scores and save up money for a down payment.

A worry for builders, in this environment of steeply scaling back their land holdings and building activity, is that they may not have a bountiful pipeline of developable land once the economic troubles work themselves out, and some builders have dumped land while maintaining buy-back options for when and if their bottom lines improve.

Overbuilding contributed to the deterioration of the housing market, said Scott Ouellette, a former KB Home regional manager who is now executive vice president and chief underwriting officer for LandCap Partners, a newly formed company that seeks to grab land that has depreciated in value.

He expects the current down-cycle in the market to hit bottom in mid-2010, with prices dropping about 20 percent through 2009 and perhaps another 5 percent in 2010.

Banks are going to have to start putting more REO properties on the market, he said, and he expects to see more REOs on the market in 18 to 24 months. Until that inventory is depleted it will be a difficult environment for builders, he said.

"Part of the issue is whether (the industry) attacks the problem with a dull knife or a sharp knife," said Saccacio. If properties are priced appropriately for market conditions it could help to speed a recovery. "If we go quickly I think it would go better for us," he said, though he said it’s more likely that the down market will drag on into 2009 or 2010.

Rising foreclosures, the credit crunch, a spike in oil prices and job losses are contributing to market uncertainties, Rosen said. "We have too many things going wrong at the same time," he said.

There is the potential for a "super-spike" in oil prices to about $150-$200 a barrel, though Rosen said he expects that inflated level is not sustainable and that oil prices will settle down to about the $60-$70 a barrel range.

Anticipated major layoffs on Wall Street haven’t hit yet, though Rosen said that shoe will drop.

The U.S. dollar will likely continue to drop in value versus other major currencies in the short term, he said. And the subprime market will likely never return to the prominence and market share that it attained during the latest real estate run-up.

The U.S. must focus on building a sustainable economy, and reduction in dependence on foreign manufacturing and petrol fuels are parts of this equation, he said.

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