Economist Cautiously Sees 'First Steps Back' For Housing Market

The "American Dream" has turned into a nightmare for many homeowners this year. But there have been some fleeting signs of improvement in recent months. Will that turn into a trend in 2010?

The Case-Shiller Index, which is considered a barometer of the nation's housing climate, might offer some indication in the year's final report. The index is due out Tuesday.

Economist Chip Case, who developed the report, recently joined WBUR's Bob Oakes to discuss the housing market and the outlook for next year.

Speaking of the housing market's role as a catalyst in recovery, Case said, "It's probably not going to lead us out by itself. In the past, every recession has ended with a big boom in housing construction. Housing starts are down now and they've been down to 500,000 from a high of 2.25 million nationally. Housing production is not likely to come back real soon.

"But what we have to do is stop housing prices from falling further, which would further disrupt the mortgage market and create more financial trouble. If housing prices stop falling, that's a good thing, and I think they have. But that's the first step towards generating new production."

Though new home construction is stagnant, Case does see a lot of activity in the sector.

"We're doing a lot of sales right now," he indicated. "We have a huge inventory of unsold property that's out there waiting to be sold and prices have been falling as a result. That inventory is starting to clear, which is the first step back."

Case said sales were so robust because of the extensive inventory of foreclosed properties, buyers stirred by prices that are down 30 percent nationally, low interest rates and the $8,000 new buyer federal tax rebate.

"It's almost impossible to ignore the buying opportunity," said Case.

Despite the sales conditions, the Wellesley College economist qualified his expectations of the tenuous state of the overall market.

"We have to distinguish between a recovery, and stopping the flow of blood," clarified Case. "We've had falling house prices for quite a while, and now have four to five months of stability. That stability is very good for the mortgage market.

"But, if prices continue to fall, then mortgages in 2008 and 2009 turn bad. And if they turn bad, then the financial sector is back in hot water. That's the big worry. If we can stabilize house prices, though, and get them up a little bit and start writing some good mortgage paper, that will stimulate demand. That will help recovery."

Case reiterated the significance of house prices going forward, and his cautious view of positive indicators.

"We're walking on eggs," he said. "There are a lot of opportunistic signs, but we're not out of the woods with unemployment as it is and house prices sitting at the bottom but not showing much movement yet."

Case added that his previous and current homes in the Boston area have increased significantly in value over the last 33 years.

"I don't have a mortgage," he said frankly. "I've made more money living in my house than I've made teaching."

From 1975 to 2005, housing prices increased nationally every year.

"That kind of ride builds in expectations," said Case. "It's really a national bubble that led to all this mortgage credit. ... It's an exciting and interesting part of the economy that, just unfortunately this time around, hurt a lot of people badly and brought the world economy to its knees."

Case retired this month after 33 years teaching at Wellesley College. He is currently working on a new textbook and continues to monitor the housing market in Massachusetts and across the nation.

Click "Listen Now" to hear Bob Oakes interview Chip Case.