Could 2014 be the year the housing market really recovers? Part B

by Dr. Owusu Okizito

Here’s a look at a few important facets of the housing market that will shape the environment in 2014 and beyond.

The buyers: Demand sizzles in Boston, despite higher interest rates
In some local housing markets, there are simply more buyers shopping than there are sellers with “for sale” signs at the curb. Sellers can sometimes take for granted that they’ll have multiple offers to choose from. The regular buyers may have to change strategy when competing with investors in a bidding war to get a good deal for themselves. By securing a good deal, they may build equity faster in their own homes and possibly save some money. Most places across the US aren’t seeing this same level of competition. But, despite a rise in interest rates since last spring, buyers in the most popular urban neighborhoods or suburbs face a similar pressure to pounce quickly. Other markets that were hot last year, including Phoenix, have cooled off, however, as investors have moved on and traditional buyers have grown more cautious.

The builders: Construction rekindles from Texas to California
In the past decade, many US home builders have been through a tumultuous boom and bust, and aren’t eager to repeat that experience. So despite all the talk of “lean inventory” in the US housing market, and the reality of double-digit price increases last year, builders aren’t rushing to pour foundations on every lot they can find. The good news is that will help prevent overbuilding, or having supply get ahead of demand. Overreaction on the part of the builders caused problems in the past and not repeating the same mistakes is good for the market. That should be good for profit margins for these builders. The potential downside for the US housing market could be a pace of new construction that undershoots demand. After all, home building fell off a cliff during the Great Recession of 2007 to 2009 and still hasn’t recovered to normal levels.
The spring season of 2014 is expected to be a good one with strong buyer demand in the robust markets from Texas to California, where the down-and-up roller coaster has been more volatile. If the housing recovery continues, construction activity should follow for small builders as well as large players. For now, one of the biggest segments of construction activity is building apartments and condos. “Multifamily” housing units cater to a new environment in which buying a stand-alone home isn’t as easy for families as it was during the 2000s credit boom. Behind this shift in demand: Many older households have turned from owners to renters, at least while they wait to repair foreclosure-damaged credit scores. Meanwhile, student debt and a weak job market make it hard for young households to save money for a down payment.

The helpers: Chicago’s a reminder that housing-market distress persists
The great foreclosure surge has been diminishing, but it’s not over. Although it wasn’t an epicenter of the housing boom (like Nevada or Florida), Chicago was hit harder than many big US cities when the recession and housing downturn came. The share of Chicago mortgage holders who have “negative equity” (mortgage balances larger than their home’s current value) is about 1 in 3, well above the national average and about on par with distressed areas like Tampa, Fla., or Detroit. The housing market recovery really depends on where you live; the market is much steadier now in Dallas or Boston than in most Midwestern cities. It’s also true within an area like Cook County in Illinois. A lot of communities are on the rebound, but some south- and west-side neighborhoods are still seeing year-over-year declines in home prices. The problem, in large measure, is jobs and incomes. Low-income neighborhoods are often the last to feel a recovery in jobs. And even for people with jobs, wage growth has lagged behind historical norms. Yes, sagging prices have made housing “affordable.” But other factors hold potential buyers back: weak income growth, lack of confidence about the economy, and a loan-approval climate that has swung from too loose (during the housing boom) to arguably too tight today.
The federal Home Affordable Modification Program helps distressed borrowers lower their mortgage costs and avoid foreclosure. But the special support starts phasing out after five years, a time frame that was intended to allow the economy – and people’s personal finances – to recover from the recession. That five-year period is drawing to a close, with mortgage rates set to start adjusting upward on many of the loans in 2015. The pocketbook recovery, meanwhile, is still a work in progress.

The regulators: Mortgage market still leans heavily on government support
For US policymakers, healing the housing market so far has been a lot about stopping a downward spiral in home prices. The Federal Reserve has kept interest rates low in part to help make homes attractive to buyers.
The effort to maintain the flow of low-cost credit has helped sellers, not just buyers. As home prices have bounced back from recession lows, fewer would-be sellers are staying on the sidelines because of a loan bigger than the home’s value.
But another big hurdle for policymakers still looms: overhauling America’s mortgage-lending system for the long term. Since the recession, the vast majority of new home loans have been extended with some form of government guarantee. Borrowers deal with a private-sector lender – a bank or a mortgage broker. But the loans are often resold to investors, whose confidence hinges on guarantees (against the risk of default) provided by the government-backed corporations Fannie Mae and Freddie Mac. In many other loans, the Federal Housing Administration bears the risk. Both parties in Congress agree Fannie and Freddie should ideally play a smaller role, to reduce risk to taxpayers and to encourage a greater private-sector role in the market. “There is near unanimous agreement that our current housing finance system is not sustainable in the long term,” Sen. Tim Johnson (D) of South Dakota said recently, announcing a bipartisan plan for mortgage reform.
Both sides agree that a government role is needed to help ensure a reliable flow of mortgage credit when hard times hit. Their plan is to replace Fannie and Freddie with a new federal mortgage insurance corporation that would raise private capital to insulate US taxpayers from financial risk. Delays in overhauling the lending system mean leaving the housing market in limbo, with taxpayers saddled with too much risk, the mortgage industry uncertain about its future, and Congress tempted to tap Fannie and Freddie for purposes unrelated to their core mission. So it’s time to move forward, economists say, if Congress can capitalize on the growing level of bipartisanship on the issue.

Reference:Trumbull, M. (2014). Could 2014 be the year the housing market really recovers? The Christian Science Monitor. Retrieved from http://www.csmonitor.com/Business/2014/0322/Could-2014-be-the-year-the-housing-market-really-recovers

Dr.Kizito is the President and CEO of Investigroup Companies.He can be reached directly on (908) 977-7320 or email him at okizito@investigroup.org. Follow him on twitter for updates @okizito1.

Posted by admin on Aug 20 2014. Filed under Community News. You can follow any responses to this entry through the RSS 2.0. You can leave a response or trackback to this entry