Housing still can't find a date for economic recovery dance

McClatchy NewspapersApril 11, 2011 

WASHINGTON — Many sectors of the U.S. economy are showing heartening signs of growth: Employment, international trade, manufacturing and professional services among them.

Then there's the miserable housing sector. It's still missing from the list of positives, still a net drag on the U.S. economic recovery.

Where's the bottom? Four years into the housing crisis, specialists still aren't sure if we're on our way up or still have further to drop.

Mark Zandi, the chief economist for forecaster Moody's Analytics, expects a bottom in home prices next year and recovery thereafter.

"House prices will bottom out by year's end as the market works through a bulge of distressed sales," Zandi said. "Sales, construction and prices will be recovering in earnest by this time next year."

That's too soon for Mark Vitner, a senior economist at Wells Fargo Securities in Charlotte, N.C. He doesn't see the housing market returning to normal until 2016. Yes, five more years.

"If you assume we're adding 2.8 million people a year (to the U.S. population); 1.35 million new homes a year. Tear down 200,000 a year ... we don't get to a normal year until 2016, really," Vitner said.

Even when home prices stop sliding in much of the country, or sales by distressed borrowers level off, there's a whole other wave of pent-up sellers waiting on the sidelines.

"You've had a lot of people who've held homes off the market because they don't want to compete with foreclosures. It's likely to be a buyer's market for awhile, mainly because there are so many homes on the market and there is still a limited supply of qualified buyers," Vitner said. "The supply of buyers is being limited by high unemployment and the large number of people with homes they can't sell."

Here's one grim indication of where housing stands. Before the housing bubble burst, residential investment accounted for about 6.3 percent of the nation's economic activity. Today, that number has fallen to around 2.4 percent, according to Michael Mussa, a former chief economist at the International Monetary Fund who's now with the Peterson Institute for International Economics, a research group.

Another measure: In February, the last full month for which data is available, distress sales accounted for almost four in every 10 homes sold nationally, according to the National Association of Realtors.

In March 2008, distress sales accounted for 18 percent of total sales. This number peaked at 49 percent in March 2009, and fell to the low 30-percent range for most of last year as many states imposed foreclosure moratoriums. The number climbed back to 39 percent in February as these bans were lifted.

"The uptick in distressed sales in recent months results from tight credit and smaller shares of traditional buyers," said Walter Molony, a spokesman for the National Association of Realtors. "As a consequence, all-cash sales and investors have been a larger share, with a focus on the discounted pricing of distressed property."

Tight credit is a polite way of saying banks aren't lending. After the easy-money days of the housing boom, banks hit reverse and are reluctant to lend for refinancing an existing home or purchasing a new one.

There's logic to the banks' reluctance. If prices are going to keep falling, then homes could quickly be underwater — worth less than the mortgages that financed their purchase. An estimated 25 percent of homeowners in the U.S. currently are underwater, unable to build equity as they make monthly payments.

"I think what makes the cycle particularly unique, painful, just difficult, is that ... 1 in 4 homeowners nationwide are underwater," said Leslie Appleton-Young, the chief economist for the California Association of Realtors. "In California, I believe the number is 31 percent. It's a whole different decision to trade up or down when you don't have any equity in the mix."

California, the nation's most populous state, has a unique dynamic in its housing recovery. Parts of the state, especially around the state capital of Sacramento, had a huge run-up in home prices and tremendous overbuilding. These areas have seen prices drop as much as 70 percent. The state's median home price, the midpoint, hit bottom two years ago; sales have picked up by about 20 percent since then, said Appleton-Young.

"We are running on a cycle where we dropped harder faster than the nation. We came back pretty strong," she said, noting that the number of homes available for sale on the low end of prices is down to about six months' inventory. That suggests the worst may almost be over on the low end of the nation's largest housing market.

For high-end homes in California, there's roughly 10 to 12 months of inventory, meaning only steep price cuts will reduce this number.

Data provided by California real-estate agents show that 56 percent of all homes sold in the state in February were distress sales. That's up slightly from 55 percent in February 2010. In Sacramento County, 71 percent of all home sales in February were distress sales, up from 68 percent in February 2010.

The story is much the same in the Sunshine State. For the Orlando region, which saw both a population and housing boom, foreclosures and short sales — an agreement in which a home is sold at a loss with the lender's blessing — accounted for almost 69 percent of all sales last year, according to the Orlando Regional Realtor Association. This February, they accounted for more than 73 percent of sales. A decade ago, this figure was less than 3 percent.

Further south, distressed property sales of single-family homes represented just under 70 percent of sales in Miami-Dade County in February, and 58 percent of sales in Broward County, home to Fort Lauderdale. Almost 59 percent of condos and townhouse sales in Broward were distress sales in February, almost 73 percent in Miami-Dade County.

If that sounds dismal, South Florida real-estate agents see a glass half full.

"Miami's unique real estate market has seen housing inventory drop nearly 55 percent in the last two and a half years while sales continue to rise. International buyers in particular, who represent 60 to 90 percent of total sales depending on the neighborhood or building, are attracted to Miami's multicultural character ... and enviable weather," Jack Levine, the chairman of the Miami Association of Realtors, told McClatchy. "An improving job market for local and domestic buyers will only enhance the market's positive direction."

The Mortgage Bankers Association finds reason for optimism too. Its most recent data show across-the-board decreases in mortgage-delinquency rates, especially those payments that are late by three payments or fewer.

"We are still pretty much in the same place we were six months ago," said Jay Brinkmann, the chief economist for the group, adding that last year's end of homebuyer tax credits created a predictable dip in sales. "I am still thinking that between some of the better jobs numbers and interest rates being low on a historical basis, that we may end up with a pretty robust spring in terms of purchases."

California and other high-cost states may also see an uptick of sales for an odd reason: Mortgage finance titans Fannie Mae and Freddie Mac, in government hands since 2008, may lose their authority to buy higher-priced mortgages — as much as $729,750 for single-family homes — after September. Republicans, who now control the House of Representatives, may let the higher loan limit expire, reducing Fannie's and Freddie's role in the housing market.

"It may provide a spark in spring sales. After that, financing loans of that size will be more extensive," said Appleton-Young, adding: "It's going to be a couple more years" before normalcy returns to real estate markets.

Michelle Meyer, a housing economist with Bank of America Merrill Lynch, is more blunt about prospects for the national housing market.

"The bottom line is that housing conditions vary significantly by region, zip code and even street," she wrote in March 25 research report. "For those in the market — either buyers or sellers — do not expect a normal experience, because it does not exist."

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