Showing posts with label recovery. Show all posts
Showing posts with label recovery. Show all posts

Monday, October 12, 2009

Housing Market Problems Persist Despite Government Intervention

Housing Market Problems Persist Despite Government Intervention

According to this REUTERS article, Housing risks still lurk even as buyers return, the US housing market will likely decline further due to continued pressure from adverse economic forces. The article proposes that the most significant economic forces which will hurt the real estate market in the near and mid term future are:
  • Expiration of the first time home buyer tax credit on Novermber 30, 2009.
  • Continued job losses.
  • High rates of foreclosures.
The article states "On the surface, a glimmer of confidence is returning to the battered U.S. housing market, after more than three years of gut-wrenching defaults, price slumps and foreclosures. But investors and homeowners in California, the most populous U.S. state and a benchmark for housing across the country, are bracing for another fall as emergency government support measures fall short or expire." The quotes Mark Jacques, a mortgage broker in Corona Del Mar, California as saying "All that has been achieved is to put off the real pain until later on. I'm hunkering down for the storm." I agree with this comment. The real problem with the real estate market is that housing prices still exceed the historical ratios of incomes to housing prices - in short houses are still too expensive when compared to the incomes people actually earn.

The article states "California led the United States when housing prices soared early this decade, spurred by an array of public policy incentives to encourage home ownership. The boom fueled a frenzy of lending and spending that drove the U.S. economy. But California proved to be the epicenter of reckless lending that pushed housing throughout most of the United States over a cliff in 2007, triggering a credit crisis that plunged the world economy into recession. The sobering view now from ground zero of the U.S. property market underscores the problems faced by President Barack Obama as he tries to fix the U.S. economy. Washington is trying to stem rising numbers of homeowners who cannot afford their mortgages as job losses mount. Housing prices have fallen to levels not seen since 2003. But even investors pouring millions of dollars back into real estate say it may take up to four more years for California's housing market to settle. The reasons why -- rising foreclosures, joblessness and tight credit -- are not unique to the state and may have already slowed a recent recovery in places like Florida."

Tax Credit Threat

The article describes how the potential housing rebound will be challenged by the expiration of the $8,000 first time home buyer tax credit on November, 30, 2009. According to the article, the "(tax credit) plan has resulted in 357,000 home sales so far in 2009, out of a total 3.88 million, according to a survey of realtors by research firm Campbell Communications Inc." The article quotes John Burns Real Estate Consulting in Irvine, California as saying that ending the tax credit "will likely cause a drop-off in buyers, or a "false peak" of the budding housing recovery."

Recent rumblings in Washington indicate that the government is considering extending and/or expanding the home buyer tax credit due to their concern that the housing market is still not stable. I have to say that the housing market is definitely not stable.

According to article, "Helped by government measures and a sense that the worst of the price slump is over, U.S. home prices have risen nearly 4 percent from their low point in April. But the bounce was preceded by a 33 percent slide since the peak in July 2006. The nascent housing recovery has combined with stronger data in other sectors to suggest the U.S. recession is over. This has helped thaw credit markets that are the lifeblood of the economy. Bidding wars are breaking out in some areas. Sales are now routinely above asking prices in California, from wealthy Orange County towns like Irvine to harder-hit San Bernardino County in the high desert east of Los Angeles." Apparently foreclosed houses are selling for 25-30% less than their 2007 market peaks, but still about 40% more than their original new construction prices of 2002. To me, those prices are still too high. Ask yourself, did incomes of the buyers for these types of homes increase 40% from 2002 to 2009? The answer is "No". Therefore, those homes are still priced too high.

Job Loss Threat

According to the article, "Efforts by the government and by banks to help struggling homeowners cut payments and stay in their homes are outpaced by mortgages going bad. The mortgage-modification programs risk being swamped by rising unemployment." A recent mass loan modification event in Los Angeles "drew 50,000 people over five days, hoping for mortgage-reduction deals to help keep them in their homes." The article quotes JC Ferebee, manager of Wells Fargo's team at the mass loan modification event, as saying "When you look at the whole culture right now and the economy with the jobs situation, it's a domino effect." We already know that the September 2009 US unemployment rate hit a "26-year high of 9.8 percent and is likely to head into the double-digit levels already suffered in California. The jobless rate is usually considered to be a lagging economic indicator because employers are slow to hire after a recession as they wait to be sure a recovery is for real. Economists fear that a protracted and high unemployment rate this time will deter Americans from spending more again on houses and goods, raising the prospect of a slow recovery." In short, jobs drive consumer spending and home purchases. With the economy shedding over 500,000 jobs each month there can be no real and meaningful housing market recovery.  What we are seeing now is more mirage than substance.

Foreclosures Threat

In previous blog posts I have stated that the banks are holding back on offering their foreclosures for sale and not taking back homes even when the home owners haven't paid their mortgages for many months. My opinion is that the banks are trying to artificially inflate the market values of their foreclosed assets (i.e. homes). According to the article, "Economists fear a repeat of the flood of foreclosure listings that scared all but vulture buyers -- specialized in assets few others want -- and sped the 2008-09 price slump. More than half of house sales in southern California in late 2008 and early this year involved "distressed" properties, accelerating price drops, according to Thomas Lawler, founder of Lawler Economic & Housing Consulting in Leesburg, Virginia. In response to the slump, banks slowed foreclosure sales to seek other solutions for homeowners and help shore up prices. At the same time, the Federal Reserve's emergency slashing of interest rates to near zero has helped encourage buyers to take advantage of the lowest prices in decades and a rush by the Federal Housing Administration, a U.S. agency, to guarantee more loans is also helping would-be home owners find credit. But the emergency steps by the government and the Fed will be overrun by economic forces, according to many analysts. "We are far from persuaded by a little summer upturn in a sector that the government had endeavored so mightily to support," Deutsche Bank said in a report last month. In California's Inland Empire -- a 27,000 square mile (69,900 square kilometers) region made up of Riverside and San Bernardino counties, prices will likely fall 15 percent from June for a peak-to-trough drop of 66 percent, the most for the biggest 10 U.S. metropolitan areas, Deutsche Bank predicted. Local buyers rely not only the scheduled-to-expire tax credit but almost entirely on funding from the FHA, which in response to rising taxpayer losses may soon tighten access to its credit. One bill would require bigger down-payments."  I discussed this FHA insolvency issue in a previous blog post.  In short, lending irresponsibly is not a solution for a problem that was caused by lending irresponsibly.

Regarding the failure of loan modifications, the article states "Nearly 43 percent of homeowners whose mortgages were modified in the first quarter fell behind on payments within three months, data from the U.S. Office of the Comptroller of Currency shows. For older modifications, the re-default rate is above 50 percent.  Postponed foreclosures have created a backlog that banks may have little alternative but to dump onto the market.  Foreclosures being processed surged nearly 80 percent in the second quarter from a year earlier to nearly 1 million. But completed foreclosures fell nearly 10 percent to 106,007, the OCC says.  Brokers in California bemoan what they say is just a delay in the inevitable pain of people losing their homes and the follow-on boom in sales of cheap properties, something for which there is no shortage of demand today.  Bruce Norris, president of property investment firm The Norris Group, said inventory levels are "completely artificial, completely baloney ... The delinquency rate (in California) has exploded, but inventory levels have gone down. In many of these cases the banks have simply avoided foreclosure."  I have been saying this for months.

According to the article, "Amherst Securities, a broker-dealer specializing in residential mortgage-backed securities, calculated a mountain of 7 million U.S. housing units is likely to end up on the market -- equivalent to 135 percent of a normal year's supply." Fred Arnold, a broker in Stevenson Ranch, California said "It's going to drip on the market.  We don't have the state and federal government that will let the natural supply and demand market occur which is pushing the real estate problem into 2012."  Amen, that is what I have been saying for months now.  The best way to get the housing market to stabilize is to allow the housing market to hit the real bottom, which will be at prices that buyers can actually afford without government subsidies.  Per my previous post, it will take until about 2020 (or longer) for home prices to return to their 2006 peaks.  For homeowners who owe more than their homes are worth and who have lost their jobs or suffered a reduction in their incomes 2020 will probably not come quickly enough.  Many of these homeowners will need to get loan modifications, sell their homes via short sales, or suffer through a foreclosure.

If you are a homeowner in Middle Tennessee who is unemployed or have seen your income decline and your home is worth less than your mortgage balance, please contact me to discuss selling your home via a short sale. I am a Middle Tennessee distressed real estate, short sale, pre-foreclosure (preforeclosure) and foreclosure expert and REALTOR. I serve real estate owners, homeowners and investment property owners in Rutherford County TN, Williamson County TN, Davidson County TN, Murfreesboro TN, Smyrna TN, La Vergne TN, Eagleville TN, Lascassas TN, Rockvale TN, Christiana TN, Brentwood TN, Franklin TN, Nashville TN and Belle Meade TN.

If you need to sell your home fast via a short sale you can my request help on my website at Get Help and Assistance from a Middle Tennessee Short Sale and Foreclosure REALTOR and Expert.