The Future of Housing
Industry Experts detail what they think will help housing.
By Marcie Geffner, Courtesy of National Association of Realtors
January 2012
It’s no secret that most of California’s housing markets have been in a prolonged slump. So, at the start of this new year, what would it take for housing to reverse course and enter a sustainable rally?
The answer involves economic, political, and social factors, all of which revolve around an end to the uncertainty that has characterized so much since the national housing crash began.
With that in mind, here’s a look at five areas in which predictability would make a difference:
DEMAND
Creation of good-quality jobs and a drop in the unemployment rate top off the list of factors that would help housing markets recover, according to Mark Fleming, chief economist at CoreLogic, a real estate research firm in Santa Ana.
“We need to find a way to give people a sense of certainty about their future income prospects,” Fleming says. “You’re not going to buy a home if you fear you might not have an income to pay the mortgage.”
Employment also fuels consumer confidence, without which consumers tend to postpone or cancel major purchases, including houses, which Fleming notes are “one of the most durable and longest durable consumer goods.”
Buyers are also affected by “deflationary expectations,” a term Fleming uses to describe the presumption that house prices will be lower in the future.
“The expectation of price declines means you’ll be able to buy more house six months from now, likely with a very similar interest rate to that which you could get today,” he explains. “That removes the incentive to [buy] now.”
SUPPLY
New home construction is barely a blip since builders have gone into hibernation. There’s “no reason,” says Richard Green, director of the Lusk School of Real Estate at the University of Southern California in Los Angeles, to build more houses without more demand. But bank foreclosures are a significant drag on housing markets. Many are listed for sale while others lurk in what’s known as the “shadow inventory,” a difficult to measure inventory of homes likely to be liquidated in the future.
Sales of so-called “distressed” properties, including short sales and bank-owned homes, have made up a substantial percentage of California home sales in recent years. Fleming says these houses, sold at a discount, are a special type of supply that puts downward pressure on prices.
A sell-off of distressed inventory would help move housing toward recovery. Yet fits and starts are likely even then since, as Green explains, “potentially, even a small uptick in prices will lead to a large flood of houses on the market again.”
EQUITY
Approximately one-third of California homeowners who have a mortgage owe more on their loan—or loans—than their home is worth, according to CoreLogic data. That means millions of homeowners are “underwater” and can’t sell their home without a short-sale approval from one or more lenders.
The solution is to reduce those loan balances or at least give those homeowners some hope of equity in the future, says Green. The need for a bailout is particularly acute in places that have been hardest hit by the housing downturn.
“There are markets in the Central Valley—Bakersfield, Fresno, Modesto—where thinking about principal reduction is essential to get the market restarted,” Green says. “Without it, I just don’t see that happening for a long, long time.”
FINANCING
Tight financing also constrains demand. Sound underwriting is welcome, but delays in loan approvals deter both buyers and sellers, Green notes. Impatience leads buyers to give up. Frustration prompts sellers to settle for lower all-cash offers. “If it took three weeks, instead of three months, to make a decision on a loan, that would have a very positive influence on the market,” he says.
A fully documented loan to a borrower who has a 20 percent downpayment, 720-plus credit score, and comfortable loan-to-value and debt-to-income ratios should be, he adds, “a no-brainer.”
POLICY
What housing really needs is “a clear long-term housing policy,” says Sean O’Toole, CEO of ForeclosureRadar.com in Discovery Bay. The federal mortgage interest tax deduction, Fannie Mae and Freddie Mac, and Prop. 13 have all been in play, creating uncertainty for real estate investors, home buyers, and homeowners, O’Toole explains.
“It’s incredible to me,” he says, “that when the market needs stability the most, we have more conversations going on about upsetting the applecart than ever. All of these things should probably be addressed, but now is not the time.”
Uncertainties in foreclosures are part of the problem as well, O’Toole says. He’d like to see a simple acknowledgement that millions of properties are headed into foreclosure, a return to mark-to-market accounting that would force lenders to resolve their nonperforming assets, and more consistency in foreclosure procedures from state to state and lender to lender.
“We need a clear policy in a clear timeframe so we can actually begin to predict when the foreclosure mess will be cleaned up,” he declares.
The bottom line is that major change will be needed to spark a housing recovery. But all is not lost. Fleming says people will continue to want to live in California and the state has ripped the Band-Aid off housing’s wounds relatively quickly compared with some other states
Marcie Geffner(www.marciegeffner. com) is a freelance real estate reporter and former senior editor of California Real Estate magazine.
Leading Indicators
Housing is measured by so many statistics that REALTORS® might well wonder which are worth watching.
Richard Green, director of the Lusk School of Real Estate at the University of Southern California in Los Angeles, suggests REALTORS® should keep an eye on the local shadow inventory, though details can be difficult to get. Days on the market is also a helpful statistic, especially if the figure can be adjusted to reflect sales that weren’t consummated as well as those that closed.
Sean O’Toole, CEO of ForeclosureRadar.com in Discovery Bay, says shadow inventory, foreclosure data, and stratified sales figures, are useful statistics. Not enough people pay attention to what’s selling within those sales trends,” he says. “I don’t think every property in a given area sells at the same rate: your higher-end homes are different than your low-end homes.”
Mark Fleming, chief economist at CoreLogic, a real estate research firm in Santa Ana, says job creation numbers and unemployment rates are useful economic measurements. “As the average or median prices are going up or down on new listings,” he says, “that sets a very insightful indicator of likely prices of actual sales in the future.”