In Uneven Recovery, Expect Ups and Downs

Article Shared By:  RE/MAX Complete

Recovery is going to take time, so expect good news and bad

 

There's been no shortage of tough news throughout the housing crisis, but the level of public uncertainty seemed to grow even higher in reaction to the Q1 S&P/Case-Shiller Index released May 31.

"Housing Imperils Recovery," the Wall Street Journal proclaimed in a June 1 front-page story that would have rattled any optimist. Newspapers, websites and TV networks across the country aggressively echoed the dire tone in covering Case-Shiller's announcement that home prices had dropped to 2002 levels and could go lower.

Case-Shiller is a delayed, moving average of resales in just 20 markets, not a precise measure of national home values. And although other credible entities such as CoreLogic and Altos Research released more encouraging data the same week, their studies failed to garner as much attention in the mainstream media.

So when Case-Shiller numbers look bad, as they did last month, millions of people – professionals and consumers alike – become discouraged. But what everyone must keep in mind is that all of the key economic metrics, from housing to employment to consumer confidence, will be delivering both good news and bad as the sawtooth recovery takes hold and gains momentum. On some days the future will appear bleak, as it did in early June; on others, the glimmers of hope will crack through.

That's the nature of an uneven, prolonged recovery. The June 6 Kiplinger Letter summed it up well:

"Time alone will cure the nation’s ailing housing market. It’ll be years before most of America sees normal gains in home prices; the result of enormous overhanging supplies combined with constrained demand. That’s one big reason this economic recovery will take a meandering path."

In other words, there is no quick, comprehensive fix. This is simply going to take time. For instance:

• Time for jobs to return

Unemployment didn't cause the housing crisis, but it's the major factor in the vicious circle delaying a rebound. Jobless families can't pay their mortgages, which spurs default, which deflates home values, which causes more trouble. Almost 24 million people in this country are either out of work or underemployed, and that represents the single biggest problem in the economy. Those without jobs can't spend, and those with jobs are reluctant to, given the uncertainty of their positions.

After three months of relatively positive news, when 220,000 jobs were being added to payrolls each month, only 54,000 were created in May, according to the U.S. Department of Labor. That figure was far lower than forecasts, and left the official national unemployment rate at 9.1 percent, up from 9.0 percent in April but still down from 9.8 in November 2010.

Thus far, government action to stem joblessness has had little effect. This needs to be priority No. 1, with innovative solutions that are more substantial and less political. Nothing is more important.

• Time for lending to stabilize

To some degree, the pendulum that allowed a no-doc, no-down jumbo ARM has swung too far in the other direction, freezing out credit-worthy potential buyers. Higher downpayment requirements, increased FHA costs, tightened credit rating screens and other factors have made it difficult for people, especially first-time buyers, to obtain financing.

The debate in Washington about what constitutes a qualified residential mortgage has added to the uncertainty. The issue should be resolved in August, and if a reasonable QRM definition is adopted, credit could return to more traditional conditions. If the QRM bar is set too high, non-QRM loans will be too expensive for many capable buyers. That won't help anyone.

Skin in the game, on the part of both buyers and banks, is a worthy concept, but sound underwriting practices are the real key. Lending will resume a normal pace eventually because lending is profitable; until then, tight financing remains an obstacle.

• Time for households to form

Although other factors receive more attention, the lack of household formation played a major role in the crisis. According to Harvard University's 2011 State of the Nation's Housing report, annual household growth from 2007-2010 averaged about 500,000, which is less than half the 1.2 million annual rate of 2000-2007. That lack of new households created a massive shortage of first-time buyers, and in turn dampened the rate of subsequent move-up sales.

This happened despite the fact that Millennials, or Echo Boomers, were entering their prime family-formation years in numbers greater than the Baby Boomers did several decades ago. Given the constraints of the economy, young people by the millions have been postponing family life and instead living with their parents.

This won't last forever, however. The Millennial generation's drive and determination – these are high achievers, after all – won't allow it. And although many of these young people may choose to rent, far more will embrace the timeless appeal of owning, just as their parents and grandparents did. Yes, homeownership rates are falling, but only back to sustainable, conventional levels. As the economy rebounds, competition for smaller homes, especially near urban services, will be fierce, as more and more Baby Boomers look to downsize.

• Time for foreclosures to stop

According to CoreLogic estimates, 10.9 million, or 22.7 percent of all U.S. houses with a mortgage, were underwater as of the end of Q1. Surprisingly, that's a tick better than the 11.1 million properties in negative equity positions at the end of 2010. Add about 2.4 million homeowners with less than 5 percent equity, and more than 27 percent of the nation's mortgage holders are at risk. Almost half of these borrowers, CoreLogic noted, also have second mortgages.

The better news is RealtyTrac's report that foreclosure filings were made on just 220,000 properties in April, a 9 percent drop from March and a 34 percent decrease from April 2010. This stat is misleading, however, as the decline is tied more to changes in processing than anything else. Nationally, it's taking an average of 400 days from initial default to a completed foreclosure, more than twice the time it took in 2007.

Unfortunately, loan modification efforts, although admirable, haven't been effective on a large scale. Short sales provide a better route for homeowners who simply cannot afford their mortgage payments, and it's been encouraging to see improvements in the process. Many properly trained real estate agents have become proficient in this area, and they offer a viable solution for families looking for a graceful exit from a bad situation.

• Time for inventory to clear

No one is quite sure how many properties comprise the massive REO shadow inventory lurking behind the active market. But even the most conservative estimates put the number in the millions, so undoubtedly it will take years to work through it.

Investors will buy many of these properties. Investor purchases, often cash deals, already represent about 20 percent of all sales, and as homeownership drops and the demand for rental properties rises, investors will become even more involved. To a large degree, investors establish the bottom of a local market, so their prevalence should be seen as a positive sign.

Overall, distressed property sales account for half of today's transactions, according to the National Association of Realtors. Fueled by investors, damaged REO transactions are booming, and prices in that space appear to be firming.

• Time for confidence to return

The GDP gains that formally ended the recession have not reached Main Street in a meaningful way, and the Consumer Board Consumer Confidence Index dipped in May after a jagged rise from its 2009 lows. Workers are unsure about their employment. Potential buyers are unsure whether prices will continue to decline. Struggling families are unsure of their options. Officials are unsure about what to do.

And that's unfortunate, because for many people, it truly is a great time to buy. Prices are more affordable, selection is wide, sellers are motivated and interest rates are extremely low. It's understandable that potential buyers are nervous amid the tough conditions, but they also should realize that if their job is secure and their finances are in order, getting into homeownership at this point is a strong option. That's especially true of they intend to stay in their home for a long time.

Moving forward

Housing has led the country out of every other recession, but it hasn't happened this time. Residential construction has virtually vanished as an engine of economic growth, and the impact of housing on GDP lags the historical norm.

Nevertheless, recovery will occur. It will be slow and gradual, with many bumps along the way, but eventually the housing market will turn active and robust once again. In the meantime, people are best served by not getting too excited or too discouraged by the latest surveys, statistics or news reports. After all, just three days after its gloomy "Housing Imperils Recovery" article about Case-Shiller, the Wall Street Journal posted another story, a much more optimistic piece titled "Why It's Time To Buy."

Volatile trends and mixed messages rule the day. The only thing for certain is that recovery will take time.





Note: This piece was written as a "Ground Forces" column for the July edition of DS News. It will not appear in the magazine, so is presented here instead. Feel free to forward this email – or download and share the PDF version – with your Sales Associates.