Real Estate Recovery a Tale of Good, Bad, and Ugly

Florida Buildings
Source: Getty Images
Florida Buildings

In Miami, condominiums are hot again.

In Phoenix, builders are opening new communities.

In New Jersey, buyers are finding it takes about three years to foreclose on a property.

In Atlanta, home prices are down 14 percent annually, thanks to a new wave of foreclosures.

In California, more than half of all home sales in February involved distressed properties, but sales were up 5 percent month-to-month.

In Northern Virginia, a half-million dollar home just sold in less than a week.

The housing recovery is under way in fits and starts, but it is volatile, and it is local.

“I believe that we’re very close to the inflection point,” JPMorgan Chase CEO Jamie Dimon told CNBC recently. “People look at prices that are still coming down, but all the other signs are pointing green.”

Home prices nationally are downaround 4 percent from a year ago, according to the latest report from S&P/Case-Shiller. While price declines are decelerating, that’s a new low for the index, which is now down 34.4 percent from its peak in 2006.

“Our view is that foreclosures, excess supply, and weak demand will drive home prices as measured by the Case-Shiller indices down at least another 5 percent,” says Patrick Newport ofIHS Global Insight.

Newport points to the following negatives: 12 percent of homeowners with mortgages (i.e., more than 6 million homeowners) were either delinquent on their payments or in foreclosure at the end of the fourth quarter, according to the Mortgage Bankers Association; 22 percent of residential properties with mortgages are currently underwater, according to CoreLogic.

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While the employment picture is improving, unemployment and underemployment are still running high, andmortgage rates, which hit historical lows just a few months ago, are on the rise again.

None of this points to a speedy recovery.

Nevertheless,homebuilder confidencehas doubled in the past six months, though the upward trend stalled in March. Stocks of the big public builders are up over 40 percent in the past six months. The iShares Dow Jones US Home Construction Index Fund, an exchange-traded fund proxy for the sector, is also up even more since its October 2011 low.

“We have seen the market stabilize, driven by a combination of low home prices and low interest rates, making the decision to purchase a new home more attractive, compared to the heated rental market,” says Stuart Miller, CEO of Lennar,in the company’s latest earnings release. The homebuilder beat Wall Street analysts’ expectations with solid gains in new orders.

But rents are still rising, and rental vacancies are still falling, as younger Americans stay away from home ownership. And not all the homebuilders are seeing the same traffic.

“The pace of the recovery is uneven, however, with certain local markets showing greater strength and more normalized activity than other areas where a rebound will take longer to manifest,” says Jeffrey Mezger, president and CEO of KB Home, which recently missed earnings expectationsby a lot. “We expect that the housing market in general will gradually strengthen as the economy continues to advance.”

Town Houses For Sale in Queen Anne, Seattle
Source: HD Estates
Town Houses For Sale in Queen Anne, Seattle

While household formation has been running very low, which should bode well for future demand, it’s hard for many to get a mortgage, even with rock-bottom interest rates. In a reaction to the lax lending of the housing boom, lenders swung in the other direction, and they swung too far.

“I do think there’s some truth to that because banks’ paperwork demands are very high. We’ve gone back to old fashioned underwriting,” admits Dimon. “We do get a lot of complaints that appraisals are too tight, I think there’s some truth to that. I’m hoping that people lighten up underwriting a bit. The signs are that’s going to happen.”

The bulls and the bears are about equal on housing these days, as hope often overrides the fundamentals.

“The headline analysis has framed the year-over-year rise in sales volume as evidence of a nascent recovery in housing,” notes economist Sam Chandan. “While the increase is encouraging, investors represent an unusually large share of buying activity. Fundamental demand — where the buyer will then occupy the home — is frustratingly weak.”

Sales of homes to investorsin fact jumped 65 percent in 2011 from 2010, according to the National Association of Realtors, as bargain-basement bank-owned properties and rising rents fueled demand. More than a third of the investors surveyed said they wanted to diversify their investments, and nearly half said they would buy another property within two years.

There is still plenty of distressed supply, with 5.8 million properties owned by people either delinquent on their loans or in the foreclosure process, according to Lender Processing Services.

With a settlement in the so-called “robo-singing” foreclosure scandal behind them, major lenders are now working through that inventory. It’s unclear at this point if the settlement will speed up foreclosures and add more properties to the market or if new attempts at modification and principal reduction will stem foreclosures. In either case the supply is so great that it will continue to weigh on overall home prices for the foreseeable future.

That prompted economists in a recent Zillow survey to temper their expectations for a housing recovery, while economists at Trulia, another real estate sales and data website, say housing is, “one-third of the way back to normal.”

Trulia determined that the market recovery rate is 34 percent by averaging construction starts (up 22 percent from their April 2009 low), existing home sales, (up 47 percent from their November 2008 low) and the delinquency-plus-foreclosure rate (down 32 percent from its January 2010 high).

Whatever the math, the future is not so easily calculated.

With more regulation ahead for the mortgage market, an uncertain future forFannie Maeand Freddie Mac, and 11 million Americans owing more on their mortgages than their homes are worth, housing will not spring back to life, no matter what the season.

Instead, it will likely sputter for a while, surge, retreat and repeat the cycle, until most of the distressed inventory is sold and home prices finally find a bottom.