If unemployment holds back housing, economic growth should provide a propellant. The consensus forecast for economic growth in 2010, according to the NABE, is 3.2 percent. Coupled with the economy’s performance in the second half of last year, “real GDP growth should also be enough to recover losses from the recession and return output to an all-time high by the end of 2010,” the forecasters say.
Neutralizing the Negatives
The economy’s health is one of several reasons why home building stands on firmer ground than it did a year ago. A second would be home values, which have increased the last several months, according to S&P’s Case-Shiller Index, although many analysts are calling for another comparatively small decline this year. And median existing-home prices, as measured by the National Association of Realtors (NAR), rose throughout last year, even though 30 percent of sales were distressed properties.
But the real good news is on the new-home sales front. After reaching a nadir of 354,000 in January 2009, new-home sales established some strong forward momentum through October, rising 21 percent to 430,000. New-home prices firmed up during that period as well, though they remained slightly below year-ago levels. Economists took the appreciation as a sign of stabilization, even though the gap between the median price of existing ($173,100) and new homes ($212,200) widened to $39,100.
The industry has done so well working down its inventory that analysts worry builders won’t be able to take advantage of the tax credit extension. The Census Bureau estimates that 239,000 new homes were left for sale in October, compared to 380,000 during the same month the year before, a 37 percent decline.
Markstein isn’t worried. “Given how weak demand is, and that only a portion of the demand created out of the home buyer tax credit will be directed at new homes, builders should be able to meet the demand in time for home buyers to qualify for the tax credit. Further, some of that increased demand will come from repeat buyers” who will have an ample inventory of trade-up homes from which to choose.
Double-Dip Ahead?
Markstein is more worried about foreclosures, which he calls a “major risk” to the recovery. It’s very difficult to accurately forecast the foreclosure situation, given the many organizations reporting varying statistics. Nevertheless, he believes that foreclosures should peak during the first part of the year. “It looks like we are near the end of the worst of the crisis,” he says.
Data from RealtyTrac supports that view. It shows that foreclosure filings fell nearly 3 percent in October over the previous month. Though filings are still up nearly 19 percent over the previous year, they have fallen for three consecutive months. RealtyTrac defines a foreclosure filing as a default notice, a scheduled foreclosure auction, or a bank repossession.
“Three consecutive monthly declines is unprecedented for our report, and on first blush an indication that the foreclosure tide may be turning,” says James Sacaccio, CEO of RealtyTrac. “However, the fundamental forces driving foreclosure activity in this housing downturn—high-risk mortgages, negative equity, and unemployment—continue to loom over any nascent recovery.”
Data gathered by the Mortgage Bankers Association (MBA) provides plenty of reason to worry. In its latest survey, MBA identified about 4 million homeowners either in foreclosure or three months or more behind on their payments. “There’s a lot of potential inventory coming on the market in the next year,” says Jay Brinkmann, the organization’s chief economist.
Or maybe not. The $64,000 question is whether banks or the government can step in before people actually lose their homes, which seems to be happening in many metro areas. Home building has benefited recently from foreclosures that don’t make it to the market and depress prices. Some economists, though, question whether banks are holding back properties that they will eventually have to sell. “We’ll see foreclosure sales pick up in the spring and summer,” Zandi said at NAHB’s conference.
No doubt worried about a housing recovery being nipped in the bud, the Obama administration stepped up efforts last year to put pressure on the mortgage industry to move quicker to modify loans in danger of foreclosure. The administration began a voluntary program last February to encourage lenders to rework loans. Borrowers could have their mortgage rates reduced to as low as 2 percent over five years.
But they have to fill out paperwork first, lots of complicated paperwork, and that has proved to be a stumbling block. Nearly 60 percent of the 375,000 borrowers who qualify for the program have either sent in incomplete forms, or they haven’t filled them out at all. By early September the government had rescued only 1,700 borrowers.
The situation is a ticking political time bomb. If it takes a dramatic turn for the worse, it could undo the recent strength in home prices, setting off an unwelcome chain of events. The NAR reports that existing-home prices have increased since January, even though distressed properties now make up 30 percent of overall sales. Rising prices, of course, create stability in the market and make people more likely to buy.
Other Problems
Several other big question marks cloud any industry outlook. One of the most prominent is what happens to mortgage interest rates once the Federal Reserve stops buying mortgage-backed securities in the spring, as it plans to do. The Fed has, in effect, become the mortgage industry in the last year, gobbling up Fannie Mae and Freddie Mac paper to bring liquidity to the market. Once the agencies have to rely on private investors again to buy mortgage-backed securities, what kind of yields will those investors demand? Analysts at JP Morgan predict that mortgage rates will only increase 20 to 40 basis points.
The March timing of the Fed’s pullout, though, isn’t good. That’s close to when the latest round of home buyer tax credits will expire. Unemployment is likely to remain high. And the foreclosure situation may still be a big question mark.
Even so, most housing economists believe that these challenges won’t be enough to derail a housing recovery, benefiting from low pricing and several years of pent-up demand. Like a movie superhero, the market has established enough forward momentum that it should be able to sustain a few body blows. And by this time next year, foreclosures may be in retreat, employers should be adding jobs, and mortgage rates may still be low. 2011 could be a very good year.