While there are signs of an economic recovery rolling into 2010, keeping a foot in the winner’s circle could prove tenuous. If the recovery we are seeing today is sustainable, it is happening without the help or health of the housing market and employment. Without the participation of housing or employment, the underpinnings of the positive trends could prove fragile. Wagers on a smooth, clear road to recovery should be made with caution.
“May the wind be ever at your back, may the sun shine warm upon your face and a smooth road to your door.”For now, housing continues to take it in the chin and there are still significant challenges ahead.
If the housing recovery is still weak and on life-support, what will happen when government removes the supports? The picture is not encouraging. Having said that, I hold out that now is THE time to buy residential real estate. If I needed or wanted a house and had the ability to buy, now is time I would jump in. The convergence of low housing prices and low interest rates are not historical bed mates and the opportunity to take advantage of both will not be long lived. I venture to predict that the end of 2010 will bring an end of this bullish buyer’s market.
My biggest fear is that interest rates will continue to rise, even if slowly for the time being. The current low interest rates cannot and will not last. As housing prices approach bottom, interest rates will continue to raise the bar for affordability. When confidence returns to the housing market, sales and prices are likely to spiral upwards quickly given the amount of pent up demand the recession has sidelined.
But for now housing has several hurdles if not downright roadblocks.
Loan Modifications and Foreclosures
The government’s war on foreclosures has failed and except for a small percentage of successful modifications, has only delayed thousands of inevitable foreclosures. The Wall Street Journal comments, “As hard as they try, the banks and the Washington establishment seem unable to get a grip on a housing market that continues to spiral downwards. Delinquencies continue to increase while government programs intended to stem the tidal wave appear to be failing miserably. Realistically, we may just be getting another reminder that governmental fixes rarely work that well and the market ultimately sorts out the mess.”
Lenders brought in 728,000 borrowers through November for trial loan modifications under the Obama program. Just 31,000 have received a permanent fix so far, or fewer than 5% of those eligible.
The number of struggling homeowners is steadily mounting. According to the Mortgage Bankers Association, one in seven mortgages was either delinquent or in foreclosure at the end of September. Prices have fallen 29% from their July 2006 peak to October 2009, based on the S&P/Case-Shiller Home Price Index, which tracks home values in 20 cities.
Some owners are defaulting because they have lost their jobs. Some are walking away from their homes and mortgages because the value is less than what they owe. Twenty-three percent of homeowners are now underwater according to the National Association of Home Builders.
We’re looking at another dreadful year of defaults and foreclosures. Clearly, the problem is not abating. More people are unable to afford their homes and given employment opportunities, there is little chance that there will be a quick turnaround in their ability to pay their mortgages.
The Wall Street Journal reports on the pressures on the rental housing front. “Apartment vacancies hit a 30-year high in the fourth quarter, and rents fell as landlords scrambled to retain existing tenants and attract new ones. The vacancy rate ended the year at 8%, the highest level since Reis Inc., a New York research firm that tracks vacancies and rents in the top 79 U.S. markets, began its tally in 1980.”
While apartments share the black hole with "for sale" housing for now, it is likely that the industry will emerge from the doldrums well before a sales recovery for homes. Watch for Emerging Trends.
Without a tax credit to benefit homebuyers and without artificially low interest rates will there be a double dip in the housing recession? When the first tax credit for first-time homebuyers was over there was a stark difference in home sales, particularly in the lower price ranges. The second housing tax credit is set to expire April 30, 2010 (for contracts signed) and there is no reason that sales will not once again decline without the tax benefit.
FHA, who went from insuring three percent of all home loans at the height of the housing boom to now backing about 35 to 40 percent of new loans, has just locked the gates and tightened their underwriting guidelines as a result of runaway defaults and reserve deficits.
Fed Purchases MBS
Although unlikely, it is possible that the Federal Reserve could pull the plug on buying mortgage-backed securities from Fannie and Freddie (to bring down interest rates and loosen credit for home loans) after the March deadline. Word is that if need be, depending on conditions in the economy, housing finance and in financial markets, the central bank is prepared to contemplate an extension, for the second time, of the March deadline.
Ronald Temple, portfolio manager at Lazard Asset Management predicts that rates could rise by a full percentage point after those purchases end and it would precipitate further downward pressure on house prices.
If the government stops buying the MBSs, it is doubtful that the private capital markets will reenter the MBS market with much enthusiasm even with the current conservative lending practices. Moody’s released this week their worsening opinion of the value of 2005-07 RMBS products and although the 05-07 securities are a different animal from the worthiness of recent mortgages, the appetite for MBS is still sour to many investors.
(Moody’s last revised its loss projections in March 2009, to 13%, 30%, and 36% of original balances on 2005, 2006 and 2007 vintages, respectively.Since March 2009, when Moody’s last announced a revision to its subprime loss projections, serious delinquencies (loans that are 60 or more days delinquent, including loans in foreclosure and homes that are held for sale) in subprime pools from 2005, 2006, and 2007 have increased to 48% from 43%, 56% from 51%, and 55% from 47%, respectively (reported as a percentage of outstanding pool balance).)
Organic Sales Weak
Anecdotal reports of late indicate that cash-in-hand investors and vulture funds are buying rock bottom deals to flip. Here we go again… There are no reports to pin precise numbers to the investor activity, but the threat that their numbers are skewing reported sales numbers, both for new and existing housing inventory, does not bode well. When those properties are resold by investors they will be counted again.
Blocks of distressed condominiums are being purchased by investors which creates a double whammy by screwing up the possible financing under the strict regulations instituted for condos last year by Fannie Mae.
Organic sales are needed for a sustainable housing recovery but prospects are very soft. “With the substantial headwinds of rising unemployment, epic levels of foreclosure and delinquency, mounting bankruptcies, contracting consumer credit, and falling wages, an overhang of inventory and still falling home prices, the environment for “organic” home sales remains weak and likely very fragile.”
At the forefront of the recession, predictions were that housing was the first in the tank and would lead the nation out of the recession. But that was not to be. Despite the high foreclosure rate and sluggish sales of the real estate market in 2009, it’s encouraging that the economy isn’t relying solely on the housing market to rebound. As the economy improves the housing market will benefit. As the employment picture brightens and buyers re-enter the market our real estate world will begin to slide back to normal. The unanswered question is just what will the new normal look like?
Wall Street Journal
Mortgage Bankers Association
National Home Builder's Association