Underwater homeowners are hoping for a miraculous turnaround to restore their equity. Home buyers are waiting to see when prices will bottom, so they can make their move. Real estate agents are promising sunnier days ahead. Just don’t expect any of these things to happen in 2011.
If you gathered 100 economists and real estate analysts, and asked them how they felt about the current housing market, you’d have a pretty good idea what the rest of 2011 will be like. But don’t bother. This has already been done.
Toward the end of March, MacroMarkets released the results of its latest home-price survey. The survey collected responses from a variety of economists, real estate experts and market analysts — 111 of them. The general consensus was that the current housing market is still deteriorating.
This survey has been widely reported already. So instead of rehashing old news, let’s examine the four factors that led to the dismal outlook.
Top 4 Housing Market Killers
According to Robert Shiller (Yale economics professor and co-founder of MacroMarkets), the pessimistic views of the experts were mostly influenced by the following:
- High unemployment
- Supply overhang
- Ongoing foreclosure crisis
- “Constrained” mortgage credit
Let’s take a closer look at these four factors.
1. The Unemployment Rate
While there are glimmers of light in the labor market, unemployment is still hovering near 9%. Many analysts expect it to stay in this range for the rest of 2011. But it’s not just the jobless rate that’s suppressing the current housing market. It’s the fear of job loss.
I would wager that 90% of Americans over the age of 21 know someone who has lost a job in the last three years. I know four of these folks, off the top of my head. This strikes fear into the heart’s of would-be home buyers.
Before the recession, many of us took our jobs for granted. The idea of steady employment was viewed as a sure thing, like the rising of the sun each day. Today, we are all painfully aware of our financial vulnerability. We’ve seen how quickly the rug can be yanked out from under us.
This is clearly having an impact on the current housing market. A 2010 survey by the Home Buying Institute showed that fear of job loss was a big concern among home buyers.
2. The Housing Supply
How much housing supply do we have right now? This question has yielded all sorts of debate among real estate analysts. It really depends on how you define the word supply. Michael Feder, CEO of the real-estate research firm Radar Logic, measures the current supply overhang in years — not months.
During an interview with Bloomberg, Feder said:
“The reality which you add up all the houses for sale, houses vacant not yet on the market, houses underwater, seriously delinquent, in foreclosure, almost in foreclosure, the number is closer to 60 months, 5 years.”
Elevated supply puts downward pressure on prices. Economics 101. This is good news for future home buyers, because it could bring even bigger bargains down the road. But it’s bad news for anyone hoping for a recovery in the housing sector. If housing supply continues to outpace the absorption rate (i.e., purchases), we will see continued price erosion. This brings us to one of the major factors driving housing supply right now — foreclosures.
3. The Ongoing Foreclosure Crisis
Some people are talking about the foreclosure crisis in the past tense, as if it’s fading in the rearview mirror. Nothing could be further from the truth. In January, RealtyTrac was predicting a 20% rise in foreclosure filings for 2011.
According to Rick Sharga of RealtyTrac:
“We will peak in foreclosures and probably bottom out in pricing [during 2011], and that’s what we need to do in order to begin the recovery.”
He also mentioned the key factors that will drive the foreclosure rate this year. Sharga pointed to unemployment, weak lending, and the overhang of properties that should have been foreclosed on in 2010 (but weren’t because of the foreclosure freeze). Sound familiar? Those are the other three items on this list.
At the end of 2010, we saw a record number of homes going into foreclosure. This would suggest a spike in foreclosure inventory over the coming months. But that spike hasn’t happened yet. Why? Because we are delaying the inevitable. Mortgage lenders and servicers are facing a new round of scrutiny into their foreclosure practices. This has led to a decrease in foreclosure activity from January to February. But the rate of default does not seem to be slowing.
A pipeline analogy is in order here. Imagine a pipeline representing the foreclosure process.
- On the “input” side of the pipe, you have the homeowners who are falling behind on their payments. Many of them will soon be foreclosed on.
- The pipeline itself represents the legal process through which homes are foreclosed on, repossessed and resold.
- On the “output” side, we have an increase in housing inventory, resulting from new foreclosure homes coming back onto the market.
The ongoing scrutiny of foreclosure practices has narrowed the output side of the pipeline. But homes are still entering the input side at the same rate. It’s a classic bottleneck scenario, and it’s going to delay normalization of the housing market.
4. The Tightening of Credit
When the housing market started tanking in 2008, mortgage lenders restricted their lending guidelines. Gone are the easy-breezy days of subprime mortgages and stated-income loans. If you want to qualify for a conventional mortgage loan in 2011, you better bring your credentials. This includes a credit score of 620 or higher, a down payment of at least 5%, and a manageable level of debt. Steady employment is also a must. Don’t expect a lender to take you word on any of this — they are scrutinizing documents like never before.
Of course, this is simply a return to the days of sensible lending. Remember those days? Once upon a time, homeownership was considered a privilege instead of a right. You had to work hard for it. You had to save money and maintain a clean credit record. Then came the housing boom, when many of these requirements got watered down by lenders. Now we are back where we started.
All of the items on this list are suppressing the current housing market. But only the first three items are truly problems. The tighter lending standards are part of the solution — at least, in the long term.