Will Housing Recover in 2011?

Will Housing Recover in 2011?

As clients know since 2007, I have spoken directly to them about, and written at length in the Market Commentary that is released each quarter and can be found on our website, my various concerns about the US housing market. However it is now 2011 and after home buyer tax credits, record low mortgage rates, foreclosures and highly motivated sellers have forced home prices to 2002 or lower levels in much of the country. How does the housing market look today? ... lousy!

Once you strip away all of the rosy forecasts, stock analyst cheerleading, media gloom, optimism amongst some and pessimism by others, what is left for us to truly evaluate is the age old economic equation of- supply and demand; the two economic factors that really matter for any and every product.

What is the supply and where is it headed? The data for October shows there were 3.86 million homes on the market for sale. This compares with existing home sales running at a rate of 4.43 million. This means that at the current pace of sales, the country currently has 10.5 months of housing supply. Now some will optimistically point out that this is down from the July 2010 peak of 12.5 months of existing housing supply. It should be noted that in 2004 the country had a housing inventory of approximately 4 months of housing supply.

Two key factors presently in place to encourage a potential rebound and continued improvement are super lower interest rates and home prices substantially lower than the boom years 2003-2007. According to the latest figures for the week of 1/10/11, interest rates on 30-year conventional home loans are at 4.79% which is still within range of the all time lowest rates. 1The Standard & Poor's/Case-Shiller Home Price Index tells us that existing home prices dropped 29.6% between July 2006 and October 2010, and some analysts see them falling further.2,3

Yet, some hard facts are in the way of a recovery.

• You cannot buy a home if you do not have a job, and you will not buy a home when you're afraid of losing your job. Unemployment and its cousin underemployment represent the biggest most pervasive drag on the housing market as lack of consumer confidence leads to thwarting purchases, reducing demand, and hastening delinquencies and foreclosures.

• Banks are tightening credit again. The most recent Senior Loan Officer Survey (released November 8,2010) reported that lenders tightened access to credit for both prime residential mortgages (borrowers with strong credit history) and nontraditional mortgages ( adjustable rate loans and/or borrowers with moderate credit history) by an increase of more than 9% in each category versus the prior quarter. 4

So the average American with a strong credit history, a strong credit rating, well documented income and low debt to income ratio found it more difficult to secure a mortgage loan at the end of the year than they did during the summer. Which means this was the identical experience for borrowers who did not have well documented income, and clearly this trend in lending will only help to increase existing housing supply.

• You can't readily sell your home if it is "underwater". The latest CoreLogic Inc. data shows that 22.5% of U.S. homeowners owe more than their residences are worth.3 And home prices have swung from being up 4.3% in May 2010 (as compared to May 2009) to being down -2.8% in September 2010 (as compared to September 2009), this shift of -7.1% is in the wrong direction for a recovering market.

• The Flood Gate for Foreclosures may burst. Analysts at Amherst Mortgage Securities assert that without more government intervention, 11 Million borrowers would be in danger of losing their homes. They now argue that "the housing overhang is not caused solely by the number of non-performing loans that exist in the market. The problem also includes the high rates at which re-performing loans are re-defaulting."

Their analysts, I, and others also believe current housing market projections are under estimating the high rate which borrowers with "deeply underwater loans" (loans with 25% or greater negative equity) that had never been delinquent in the past are now falling 2 payments behind for the first time. Thus many projections may be "missing" an impending wave of future foreclosures by a group of borrowers that historically was never viewed as a significant default risk.

The sense of recovery during 2009-2010 was driven and created by government intervention both through tax credits and mortgage products. By the end of 2010, more than 80% of all mortgages were created through the Federal Housing Authority (FHA). So the homebuyer tax credit led to a spike in sales, then a downward reversal in sales and as banks lending standards continue to be tight, the FHA has effectively been the mortgage market for the past two years!

Finally on the supply front, the latest figures (November 2010) on existing home sales were down 27.9% year-over-year and new home sales down 21.2% from 12 months before.5

Increase Demand = improved 2011 labor market?Ideally, a swift rise in consumer demand for goods and services in 2011 spurs businesses to hire more workers who intern will purchase goods and services themselves. Roughly 125,000 people enter the U.S. labor force every month, so job creation needs to hit that monthly level just to tread water in terms of employment-to-population ratio. 6 In order for the US to recover the 11.6 million jobs lost during this recession, the economy would need to create jobs at the best monthly pace during the boom years of the 1990's, at about 321,000 jobs per month and then...presto 5 years later we would be back to pre-2008 employment.

As 2010 drew to a close, our economy wasn't anywhere near that. According to the Labor Department, 71,000 new non-farm jobs were created in November and 103,000 new non-farm jobs in December. Last month, the government said that private payrolls grew by 113,000 (297,000 according to payroll services provider ADP). Yet the December report also indicated a 1.3 million month-over-month rise in the population of discouraged workers who had simply stopped seeking jobs.7

On December 7, Federal Reserve chairman Ben Bernanke told the Senate Budget Committee that while we were seeing a "self-sustaining" economic recovery, the jobless rate would likely remain elevated through 2015 or 2016.8 Thus Mr. Bernanke is also acutely aware of the massive level of consistent job creation required to "bring the economy back" to pre-recession levels and therefore provide an abundance of homebuyers.

In an ideal world, the Happy New Year of 2011 brings an influx of good wage paying permanent jobs, jobs, jobs. Which increase consumers' confidence to go out and purchase a new home while mortgage rates remain well below historical levels, from banks seeking to immerse themselves in the lending business again. The rise in jobs would of course curtail mortgage delinquencies and foreclosures; thus allowing home prices to finally meet a firm bottom and gradually rise.

All of this sounds like the perfect mix for a sustainable recovery in Housing in 2012...maybe.

Citations

1 -http://www.bankrate.com/finance/mortgages/bankrate-com-averages.aspx
2- latimes.com/business/realestate/la-fi-housing-recovery5c.eps-20110102,0,1869511.graphic [1/2/11]
3- online.wsj.com/article/SB10001424052970203731004576045811887540604.html [1/3/11]
4-http://www.mortgagenewsdaily.com/11082010_senior_loan_officer_survey.asp
5-usatoday.com/money/economy/housing/2010-12-23-housing23_ST_N.htm [12/23/10]
6-brookings.edu/opinions/2010/0806_employment_looney_greenstone.aspx [8/6/10]
7- money.usnews.com/money/careers/articles/2011/01/07/jobless-rate-falls-but-american-employment-remains-bleak.html [1/7/11]
8 -cnbc.com/id/40962516 [1/7/11]