If you didn’t have a chance to attend the Presidential Seminar in Aspen this year, you missed a lot. But here’s an opportunity to catch up with what some of the country's foremost housing industry analysts are saying about the industry's outlook:
Sales Should Stabilize Late This Year
The three speakers who dealt with the state of the home building industry and the economy—David Berson, John Burns, and Ivy Zelman—agreed that sales should stabilize later this year. Given the pain and hardship that we’ve endured for the last couple years, that certainly was good news.
While the economists and analysts agreed that existing home inventory is likely to continue to increase this year due to rising foreclosures and a general inability to move real estate, they all expect government actions to liberalize credit later in the year.
“We expect the market to stabilize in the second half of the year,” said Berson, chief economist of PMI Group, adding that it would be sooner, except unsold inventory is simply too high. “The next eight months should see more liquidity [in the mortgage market]. “That, combined with recovery in the economy, argues for stability in the second half of the year.”
Berson said the economy is in a recession right now, but it should be short, because the first federal stimulus package “will put money in people’s pocket.” Taxpayers will qualify for up to $600 for a single person or $1,200 for a married couple filing a joint return.
This week, Senate leaders announced that they had agreed on a package that would provide: $4 billion in grants for state and local governments to buy foreclosed homes, a temporary $7,000 tax credit for those who buy either new or foreclosed properties, more money for counseling for homeowners facing foreclosure, and the ability for homebuilders to recover taxes already paid on built properties.
The industry will be helped by reductions in short-term rates, thanks to Fed cutting. But Berson noted that while fixed-rate mortgages (at 5.78, according to the Freddie Mac index) may be historically low, they should be lower given that 10-year Treasuries are at 3.5 percent. That’s a spread of 2.3 percent, high by historical standards.
Because of illiquidity problems, the mortgage market also suffers from an abnormally large spread between conforming and jumbo loans, he said. The historic spread of 15 to 25 basis points, he said, has widened to 100 to 125 basis points. “Normally these jumbo loans are securitized and sold off,” he said. “Not today. Fewer people want to buy.”
Builders will be helped by the fact that Freddie Mac and Fannie Mae can now buy mortgages of up to $729,750 in high-cost areas for a year, a provision that Congress is likely to extend. But since the GSEs haven’t bought any of these yet, it’s not clear what interest rates on these will be. The agencies cannot combine these large mortgages with others in securities, Berson said.
The economist noted that we’re seeing a big increase in FHA-insured mortgages, especially since the agency can now insure them in high-cost areas. Ivy Zelman added that the biggest benefits are likely to be seen in Washington D.C., New York, Los Angeles, Orlando, Tampa, and Baltimore.
Berson said he expects oil prices to drop from $100 a barrel to $75 or $80 after the summer Olympics, when the Chinese economy drops into “recession,” which would be only 4 or 5 percent annual growth.
Contrary to public perception, Berson said that in most cases people can’t afford an ARM payment because they couldn’t afford their mortgage to begin with. Most ARM holders haven’t had an upward adjustment, he said. And with the Fed easing rates, the upward adjustment may not be that great.