A real estate recovery in 2013
Supply overhang will prolong slump, say economists

By Glenn Roberts Jr., Inman News, 6/7/2010.
http://www.inman.com/news/2010/06/7/a-real-estate-recovery-in-2013

[See HOT comments below]

AUSTIN, Texas -- At least the real estate industry has 2013 to look forward to.

Continuing foreclosures and an "overhang" in housing inventory will likely prolong the housing slump for several more years, said economists who spoke Friday during an annual meeting of the National Association of Real Estate Editors.

While home sales likely reached the bottom of the current cycle last year, home values in many markets are still in decline, said Stan Humphries, chief economist for online real estate search and information company Zillow.

"The housing recession is not over: Housing prices continue to fall," Humphries said.

And housing demand may not see a normal balance with new household formation and housing starts until 2013, said Doug Duncan, chief economist for secondary mortgage giant Fannie Mae.

The "overhang or shadow supply" of housing inventory has a lot to do with the drawn-out recovery for the housing market, he noted.

Home and rental unit vacancy rates are running about 2 million units above normal levels, Duncan said.

His forecast calls for home prices to continue to fall this year, perhaps 1 percent to 3 percent more, and hit bottom in the third quarter.

A Zillow home-value index, based on automated valuations for most U.S. homes, was negative through 2009 and reached toward equilibrium as a tax-credit deadline approached, Humprhies said.

"Depreciation rates are actually picking up again" now, he said, adding that Zillow also forecasts a bottom in home prices during the third quarter.

But don't expect home prices to spike.

Humphries said he believes a more likely scenario is relatively flat prices, which means that home values will actually drop slightly, as they won't keep pace with inflation.

"We think the market will be flat in nominal terms for three to five years. We are not going to hit bottom and see a V-shaped recovery."

The "tremendous amount of shadow inventory," which Humphries defined as properties that are in foreclosure and not yet on the market or are seriously delinquent and not yet in foreclosure, is definitely a contributor to the stalled real estate recovery, he said.

Negative equity, combined with high unemployment, also are key factors.

"We're going to see more foreclosures spin out of that combination," he said.

Humphries also expects "sideline sellers" -- who are waiting to put their homes on the market once they see some semblance of recovery -- will continue to keep inventory high even as sales increase.

He noted that roughly twice as many homes were put on the market in April as were sold.

Foreclosure volume continues to increase and will likely peak later this year, Humphries said. "These rates will not recede very quickly. They're going to stay high for awhile."

The federal tax credit programs offered to first-time and existing homebuyers do not appear to have had a major impact in driving sales, he also said.

He said it's quite possible that low mortgage interest rates, low home prices and widely available FHA-backed loans would have been enough incentive for most buyers who accepted the tax credits. The programs "were just giving out money," he said. [Where’d the money go? Since it artificially raised prices, it did NOT go to the buyer. Instead, it went to builders, realtors, and lenders.]

Also, the tax credits appeared to just be "stealing demand" ahead in time, "and we're going to see a payback in July and August."

Duncan said the tax credits "unquestionably ... simply shifted demand in time period" for buyers, though he noted the policy rationale behind the tax credits.

The intent was to prevent house prices, which tend to overshoot on the upside, from overshooting on the downside as well, he said.

"Implementation of the tax credit and other policies is an implicit belief that the social cost of all of the interventions will be less than the cost of letting the market settle itself.

"There are a whole series of incremental policy changes that are designed to cushion that overshoot, and the question is whether that's more or less costly than letting them adjust on their own," Duncan said.

***

What's your opinion? Leave your comments below or send a letter to the editor. To contact the writer, click the byline at the top of the story.

Submitted by jeff davis on June 7, 2010 - 6:05am.

The world is changing. The result is that there is confusion and even a little chaos. There is fear and fear adds to both. And yet with so many lives affected, there are also some for who the change has not been life changing.
I agree that it will be years before we come out the other side. But, I question what the other side will look like. Will the trend of bigger and better pick up where it left off, or will less somehow become more. It is my opinion that our egos have outpaced the growth of our spirits and this crisis is the result. And that to resolve the crisis we'll need an ego check and to learn how to see value in a new light.
The recent trend has been one of work more and work harder in order to have bigger and to have better. The end result has been a lesson that more work and more things leaves us unfulfilled and wanting something else. I believe that "something else" is the less that is more. If that is the case we may need to downsize and simplify in order to try things a different way.
And so I believe that it's time for housing to take a new tack. The architect and builder of tomorrow need to contribute by giving us both beauty and comfort in less space and for less cost. In that way we can reserve some of resources for more spiritual endeavors and perhaps learn that our egos never deserved all that attention in the first place.

jeff davis, GRI, SFR, Ecobroker
Allen Tate Company
Broker/Realtor(R)
704-808-0496
www.HomeSearchByJeff.com

Submitted by Donald S. Teel on June 7, 2010 - 8:32am.

Jeff Davis'comment "The World is Changing" is appropriate here and I would add a question that naturally comes to mind when we read an informative piece like this one:

"Can and will the real estate industry transform its economic business model into the new model that will be required going forward?"

We are facing not only the market issues issues noted here, but I believe, more importantly, a continued deluge of transformational issues in technology, the BOOMER equation and globalization that is going to render most trandition models obsolete.

Nice article...well written and spot on!

Donald Teel - Founder
www.ePartnerUSA.com
www.REALonomics.net
928.777.8100

Submitted by Fielding Lamason on June 7, 2010 - 10:34am.

Excellent article.

I agree completely with Jeff and Donald. There are tremendously powerful forces at work trying to adapt the RE industry to the emerging new market. Unfortunately, one of the strongest forces is the vested interest of the status quo in preserving traditional ways of doing business.

The internet has and will change the fundamental precepts of the agent / consumer relationship by empowering consumers with information and knowledge that they did not have access to only a few years ago.

There are tremendous new products in the works facing the new generation of buyers and sellers.

I attended a conference last winter at which three eminently qualified scholars AGREED that the industry will not stabilize until 2014/2015. At that time horizon, predictions of what the new industry will look like are fanciful at best.

Perhaps the wisest course for forward-looking professionals is to keep an open mind to the possibilities and to keep up to speed on cutting- edge market innovations.

Fielding E. Lamason, Jr., Founder and President
Synergy Real Estate Consultants, LLC
www.synergyseattle.com

Submitted by Wayne Caswell [HOT] on June 7, 2010 - 12:54pm.

We have an oversupply of housing and a shadow inventory not yet counted and we still subsidize homeownership. Washington has been adding even more housing stimulus and deepening the federal commitment to the old housing strategy, making it harder to move to a new one. Artificial stimulus, such as those below, cause market failures in a free market society when they are written to favor special interests over their competitors. Who are the real beneficiaries? Is it the consumer or the builders, bankers, and realtors?

1. Mortgage Interest Tax Deductions.

2. Artificially Low Interest Rates and Adjustable Rate Mortgages.

3. Tax Credits promoted first time home buyers as free money and extensions to repeat buyers. Like a drug, it got the housing industry addicted. Extending the credit just worsened the problem.

4. Low Down Payments. The USDA has a zero-down home loan program, and Texas has begun its own down payment assistance program. These were homebuilder initiated proposals that are primarily aimed at generating wealth for builders, realtors, mortgage lenders, and Wall Street. Government officials knew, or should have known, that zero-down loans would put borrowers at risk and taxpayers on the hook. That's because buyers with little or no skin in the game would be more likely to default on loans and go into foreclosure when inflated home values fall below what is owed, or when property taxes or adjustable interest rates rise, or when employment or medical problems arise.

5. Down Payment Assistance. It was a way to put more renters into homes and line the pockets of homebuilders. FHA rules made the down payment issue worse by allowing volume builders to give buyers the required 3% down payment through third-party non-profit corporations such as Nehemiah Corporation in California. Builders gave money to Nehemiah, who then gifted the funds to the buyer for a small fee paid by the builder.

6. Federal Mortgage Insurance. Banks used to want 20% down now will gladly lend with just 3% down or less when the loans are federally insured. FHA, VA, Freddie Mac and Fannie Mae now guarantee some 80% of all mortgages and have insured 96.5% of new mortgages so far this year, putting even more risk burden on taxpayers.

7. Net Operating Loss Carryback. The extension of this tax provision allowed big builders to re-file their tax forms and get over $2.6 billion in rebates from taxpayers, a windfall they've been using to buy up land at discounted prices and to disadvantage smaller builders.