The housing recovery, by most indicators, will continue into 2013. But like the Great Recession it follows, the year portends to be just as ugly. There remains no good news that cannot be balanced with some nearly-as-bad news.
Housing is on the way up, in painfully slows margins. On the down side, negatives just keep coming. None of this will change next year, and maybe not the year after. But it’s the recovery the market is given, and it has to take it.
The most telling of the above conclusion for next year can be summed up nicely from the Mortgage Bankers Association.
The good news? New purchase mortgage volume will finally increase… greatly! This market is projected to increase to about $585 billion from $500 billion last year.
But then — and there’s a but for everything in housing these days — the MBA projects the refinance market will fall to about $760 billion from $1.3 trillion.
Therefore, mortgage origination is projected to contract this year to about $1.34 trillion as rates rise and refinancings fall.
Some recovery. Live with it.
While record-low mortgage rates will keep housing affordable this year, rates are expected to edge upward off record lows. This is good news for yield-hungry investors, but hardly serves as an incentive for homebuyers, who are also facing rising house prices.
The hope is that the prices will increase gradually, and not dip back down. The same goes for rates. Volatility with either one could spook potential homeowners and potential investments, though for now this remains an outside risk.
U.S. home prices climbed 3.6% in the third quarter when compared to year-ago levels, according to the venerable Standard & Poor’s/Case-Shiller home price indices. Out of the 20 metros studied for the survey, 17 of them saw higher home prices in September when compared to a month earlier — the most recent data available at press time.
Housing also gained momentum based on the latest statistics from CoreLogic’s home price index. Home prices, including the sale of distressed properties, rose 6.3% in October 2012 over October 2011. The upswing marked the largest increase since June of 2006 and the eighth consecutive year-over-year increase.
Those rising prices lifted more than 1.3 million homeowners in negative equity above water this year, the Obama administration said.
The National Association of Realtors’ pending home sales index, a forward-looking indicator based on contract signings, increased 5.2% to 104.8 in October from an upwardly revised 99.6 in September. It is 13.2% above October 2011 when it was 92.6. Construction spending, meanwhile, jumped almost three times higher than expected in October, according to Commerce Department data released in December.
“2012 was finally a good year after four consecutive years of quite difficult times. We finally broke out and turned positive in many dimensions,” said Lawrence Yun, NAR chief economist, in a recent interview with HousingWire.
NAR forecasts a 5% price appreciation this year and an 8% boost to existing-home sales.
The MBA estimates rates, which were hovering at around 3.5% at the end of 2012 to reach 4.4% for a 30-year, fixed-rate loan by year-end while the National Association of Home Builders estimates they will reach 3.99%.
“This will reflect a continuing strengthening of the housing sector, increased consumer confidence, a sustaining of low interest rates, continued slow but steady improvement in unemployment and all those variables that show growth in the housing market in 2013,” David Stevens, president and CEO of the Mortgage Bankers Association.
Banks’ capital positions and overall asset quality have improved substantially over the past several years, and, over time, balance sheet improvements should position them to extend more credit.
A number of banks reported higher profits in 2012, due in large part to record mortgage division earnings. So banks are making more on mortgages, but then again lending on a home is getting more expensive, too.
Stevens said the primary-secondary spread — the rates borrowers are paying versus the cost of the actual mortgage-backed security is widening, and it’s widening because the cost of doing business has gotten so much higher as lenders essentially protect themselves from making mistakes in the midst of very confusing rules and regulations.
Trepidation in the regulatory environment threatens to derail the housing recovery, to be sure, by tightening lending. But in a market of appreciating assets, there are always possibilities. If home prices and rates continue upward, like it or not, lenders will want to get in on the action.
Still the road ahead is daunting.
“The Consumer Financial Protection Bureau between mid July and the end of August put out six major proposed rules — over 3,000 pages worth that will collectively have a significant impact on the housing industry,” said Stevens.
“We are talking about the single biggest mass of rulemakings that this industry and the nation has ever seen, coming out all in one fairly narrow period of time in early 2013,” Stevens told HousingWire.
The barrage of regulation coupled with the slow pace of economic recovery and political gridlock in Washington add additional levels of uncertainty for the housing market. Government cutbacks to avoid the fiscal cliff could sap some economic strength, but it could settle investors to know that some type of bipartisan deal is at hand, according to the Kiplinger Report, which predicts a slow upward movement for the economy for 2013.
BRICKS AND MORTAR
Gerardo Ascencio, whose Mission Real Estate REO brokerage focuses on the San Fernando Valley and who serves as the president of National Association of Hispanic Real Estate Professionals, said demand there from Hispanic buyers is through the roof. But inventory is exceedingly tight, making it difficult for owner-occupants to compete with investors for limited inventory.
“Financing is still accessible, and down payments are still extremely low with FHA pretty much the only game in town,” he said. “I have a surplus of buyers who have their loan ready and available and are just praying for the opportunity to be able to execute on a purchase.”
Pockets around the country experienced robust growth in 2012 that should continue this year although the pace may slow somewhat, NAR’s Yun said.
“The West region, everything from the Rocky Mountain states all the way to the Pacific ocean. I think these markets will do well.” States hard-hit by the housing crash such as Arizona and Nevada should continue on their path of vigorous price rebounds and Rocky Mountain states where job creation is fairly robust should see strong demand. Inventory shortages in pockets of California, meanwhile, will drive prices upward, Yun said, especially in Northern California where job creation will boost housing demands.
California’s share of nondistressed property sales in October increased to 63.4%, the highest level since June 2008. REO sales declined in October to 12.3%, down from 28% in October 2011 while short sales picked up some steam last year.
The American Institute of Architects reported in November that billings at architecture firms accelerated to their strongest pace of growth since December 2010. And homebuilders expect to break ground on more single-family homes this year (665,000) than they did last year (530,000), according to the National Association of Home Builders.
Statistics late in the second half of 2012 indicated a strengthening homebuilder market. Private residential construction spending surged 3% on a month-to-month basis in October 2012, and housing starts rose 3.6% — both at their highest levels since 2008.
The NAHB/Wells Fargo Housing Market Index, which measures builder confidence in the single-family market, rose five points to a six-year high of 46 in November.
But this confidence doesn’t translate to a jump in business.
Housing starts remain woefully below their peak of 2.2 million starts a year in 2006, and some housing markets continue to languish. Starts will be hard-pressed to outpace the 1 million expected this year.
And the outlook isn’t any rosier for the properties that are already built and require new owners. For investors, REO to rental became hot in 2012. The flood of investors to the space in 2012 will likely die down to an extent, but the money is there.
Jordan Kavana, director of Aventura, Fla.-based Transcendent Investment Management, is a believer in the new asset class. The private equity firm remains bullish on an REO-to-rental strategy in 2013. It plans to launch a second fund with about $250 million in equity plus debt for a $400 million fund to invest in as many as 4,000 more single-family homes this year, he said.
It also will launch a proprietary software in the first quarter to help others in the space track their real estate investments.
“It looks at the life cycle of where an asset stands at any point in time,” he said.
The firm, one of the first to enter the distressed investment space, launched its first fund in 2008, using the proceeds to buy more than 1,000 single-family REO-to-rental properties based in 15 southeastern markets. With its second fund, it plans to remain firmly rooted in the Southeast but will also expand its footprint into the Midwest, Kavana said.
The firm’s strategy includes buying properties one by one at foreclosure auctions or through real estate brokerages. It also buys from Fannie Mae and Freddie Mac and in bulk, but did not participate in Fannie’s pilot REO to rental. Still, it remains bullish on opportunities despite rising prices and tight inventory in some markets.
“If the FHFA pilot takes off and they release more pools … it could be a good year for REO to rental,” Kavana said.
Both Yun and John Burns, CEO with John Burns Real Estate Consulting, believe there could be a flight to U.S. real estate by investors this year.
“It’s the one beat up asset class that you can pretty much count on that there will be price appreciation going forward,” Burns said.
Said Yun: “People will be viewing it (real estate) as a hedge against uncertainty. Just as people bought gold five to six years ago, people will be looking at real estate as a tangible safe asset.”
From an investor perspective, apartment buildings retain a lot of appeal, according to the Kiplinger Report. Vacancy rates continue to slide, and rents are predicted to climb 4.5% in 2013 as the economy adds 2 million net new jobs, spawning more household formation.
In most areas, excess capacity for apartments is still another year or two away. By 2014, look for young folks who have steered clear of home buying in recent years to enter that market, sapping demand for apartments and moderating rents, Kiplinger predicts.
SERVICING CHALLENGES
Also, a substantial overhang of vacant homes, either for sale or in the foreclosure pipeline, continues to hold down house prices and reduce the need for new construction.
“I think, nationwide, there is going to be no pig in the pipeline that comes out in 2013,” said Daren Blomquist, vice president at RealtyTrac. “The year, actually, will look quite similar to 2012 in terms of foreclosure activity.”
Although a significant amount of distressed property remains in the market, it will be disposed of in a variety of ways, which will keep foreclosure numbers headed downward.
There will continue to be an emphasis on short sales and refinancings under HARP 2.0.
The nation is on track for about 1.2 million foreclosure starts in 2012 once all the numbers are in and counted, Blomquist said. That translates into about 625,000 completed foreclosures, down from 800,000 in 2011. Concerns about too much shadow inventory hitting the market all at once never materialized.
For this year, the outcome may end up looking very similar but foreclosures may stay under 600,000 completed foreclosures by the end of 2013. That’s because properties entering the foreclosure process, while still expected to be elevated this year, are less likely to come out the other end as completed REOs, he said, due to alternative disposition strategies.
Short sales, for example, were on pace to close out 2012 at 1.1 million, according to RealtyTrac, up slightly from about 1 million in 2011. This year should be another big year, the real estate data firm believes.
About 4.1% of mortgage loans on one-to-four-unit homes — about 1.9 million households — were in the foreclosure process at the end of the third quarter, down from 4.4% a year earlier and the lowest level in 3½ years, according to the MBA.
“The housing market is still very fragile. You have a lot of homeowners who are underwater on their homes. A shock to the system like the fiscal cliff could push more of those homeowners into foreclosure,” Blomquist said. But he notes that he’s optimistic that won’t happen. RealtyTrac data shows about 12 million homeowners underwater on their homes who are current on their payments. A fiscal cliff scenario could cause some of those to stop making payments, he said.
Foreclosure rates in judicial states remain significantly elevated over nonjudicial states, according to Lender Processing Services, which tracks foreclosure data. But timelines in judicial states should turn the corner this year and timelines should start to decrease. RealtyTrac said it already sees an early indication of that in Florida. The last few quarters, the timeline there has flattened and should begin the come down, Blomquist said. Illinois could also see decreases, but Hurricane Sandy could cause timelines in New York and New Jersey to, at least temporarily, get longer.
Various efforts are under way to help distressed borrowers and many of those will continue this year.
The Federal Housing Administration in late 2012 revised its loss-mitigation programs in an effort to help more distressed homeowners stay in their homes. With the changes, a greater number of distressed borrowers will be able to qualify for FHA loss-mitigation interventions, and the level of assistance available to them will be larger than under previous guidelines.
In addition, the 2012 national mortgage servicing settlement with the nation’s five largest servicers will continue its work with distressed borrowers offering loss-mitigation strategies that include principal reductions and short sales.
ECONOMY MARCHES UPWARD
As we enter 2013, the challenge remains to put federal government finances on a sustainable path while avoiding actions that would endanger the economic recovery.
Economic growth has moved at a snail’s pace since the country emerged from the Great Recession in 2009. Unemployment, which reached a high of 10% in the fall of 2009 has since dropped below 8% but remains stubbornly high. Since the recession troughed in mid-2009, growth in real gross domestic product has averaged only a little more than 2% per year.
The extraordinarily severe job losses that followed the crisis, especially in housing-related industries, may have exacerbated for a time the extent of mismatch between the jobs available and the skills and locations of the unemployed, Federal Reserve Chairman Ben Bernanke said in November.
The economy has also faced various headwinds, including from the housing sector. Previous recoveries have often been associated with a vigorous rebound in housing, as rising incomes and confidence and, often, a decline in mortgage interest rates led to sharp increases in the demand for homes, Bernanke noted. But the housing bubble and its aftermath transformed this recovery.
ON THE RADAR
Congress, and the Treasury, also will need to address the Federal Housing Administration’s financial woes. The FHA reported a shortfall in capital adequacy. However, the FHA won’t have to draw Treasury funds until the end of the fiscal year, if necessary, so the issue will remain unsettled. The housing market may need to prepare for the worst. Policymakers likely will recognize FHA’s critical role in the housing market to ensure the fund is protected.
There are other federal legislative issues affecting housing — from the Mortgage Debt Relief Act of 2007 to a potential repeal of the mortgage interest deduction. Efforts to extend mortgage refinancing also remain up in the air.
Stateside, there continues to be a trend in legislation toward slowing down the foreclosure process in individual states. Perhaps the most notable example is the California Homeowners Bill of Rights, passed in 2012, which takes effect this month.
Such actions could further impact lending in those states and cause foreclosure problems to linger, industry executives believe.
Other state laws in places like Nevada that are designed to prevent improper foreclosures may have the unintended consequence of holding back foreclosures that need to be flushed from the system.
What are the looming challenges? First, the Congress and the administration will need to protect the economy from the brunt of the severe fiscal tightening that is built into the so-called fiscal cliff.
Such a fiscal shock could send the economy toppling back into recession. Congress will also need to increase in the federal debt limit to avoid any possibility of a catastrophic default on the nation’s Treasury securities and other obligations. The threat of default during the summer of 2011 fueled widespread economic uncertainty.
The “real” homeownership rate, which John Burns Real Estate Consulting defines as the percentage of households who own a home and are not 90 days or more delinquent on their mortgage, has fallen to 62.1%, which is the lowest level in almost 50 years, Burns told HousingWire.
He believes the 65.5% homeownership rate published by the U.S. Census Bureau greatly overstates the real level of homeownership in the country, as the bureau counts homeowners who are 90-plus days delinquent on their mortgage as homeowners.
Despite Herculean efforts by the administration to save homeownership for these people, most of them are really just renters in waiting, he believes.
And that is the best news, by far.
