Foreclosures, Tight Credit Pose Housing Recovery Hurdles
Home builders in recent weeks and months have begun to see early, tentative signs that the housing downturn has hit bottom, but panelists appearing at the May 30 NAHB Board of Directors meeting in Washington, D.C. to report on where they see the industry heading said that serious impediments remain.
Standing in the way of a return to more normal times are the foreclosures that have been flooding the market and the impact their depressed values have on the appraisal process, undermining home values and creating headaches for home buyers who have limited downpayments and builders who are trying to maintain existing lines of credit or find financing for future projects, the speakers said. The panel was moderated by NAHB Chief Economist David Crowe.
Stringent lending requirements for jumbo mortgages exceeding the Fannie Mae and Freddie Mac conforming loan limit — which has been raised until the end of the year to a ceiling of $729,750 for high-cost areas — also impose a problem, they said, for high-priced housing markets concentrated in California and in the Northeast.
Builders were also told that their prospective customers have been scarred by their experiences in the current economic downturn and are likely to emerge with an appetite for smaller, less expensive housing than they once sought.
In the meantime, they said, the job losses that have undermined consumer confidence and are now fueling foreclosures will continue to rise, albeit at a slower pace, for a period of time after economic growth resumes.
Lew Ranieri, founder of Hyperion Funds and vice chairman of the NAHB Mortgage Roundtable, said that less than 40% of the homes taken back by lenders have cleared the foreclosure process and made it to the marketplace so far. “The rest will come roaring through,” he predicted.
“We’re not moving this stuff fast enough,” he said. “It is going to choke us and damage the appraisal process.”
Ranieri cited the example of a foreclosed house he knows of in Long Island, N.Y. that sold for $670,000 in 2006, was recently listed by the bank for $495,000 and sold in a week for $430,000. In a more stable market, the home could have been sold for a higher price. Instead, the fire-sale price it was sold for has become the new price the appraiser will cite when looking for the value of the next comparable home in the vicinity that comes up for sale.
“We have to find a process to get the REO (real estate owned by the lender) inventory into safe hands more quickly,” he said. “We have to get investors back” because home buyers for these homes cannot be found fast enough.”
Ranieri suggested a 50% loan-to-value program that would enable investors to purchase the properties with a 50% downpayment and government financing. “These homes represent value,” he said, and they should be taken off the market so that their values can be stabilized.
He added that the Federal Reserve has acknowledged research showing that short sales bring a 20% lower price than homes sold by their owners. “Getting foreclosures out of the way will change the benchmark numbers” being used by appraisers, he said.
Noting that government programs have focused their attention primarily on home buyers, Ranieri said that “it’s the housing production system that’s at risk, not the mortgage system.”
However, as far as mortgages are concerned, “the government owns all of the access points for capital for housing” and is supporting the mortgage security system, which has suffered “fundamental damage.” To be sustainable, government sponsored enterprises (GSEs) Fannie Mae and Freddie Mac have to get back into the business of selling their securities “to the rest of the world,” he said.
Rising Delinquencies, Tight Jumbo Lending
Ann Schnare, a partner at Empiris LLC, also cited the current housing oversupply as a vexing problem for the industry. She voiced particular concern over “the shadow inventory” of housing that will begin to materialize once housing prices start rising again and people put their homes back on the market.
Presenting a more immediate problem, she said, are rapidly rising delinquencies among holders of prime mortgages, which will push the year’s total foreclosures into the 2.5 million to 3 million range, despite Administration efforts to modify mortgages to keep households from losing their homes.
“The recession is a major part of the problem, not bad mortgage product but job losses,” Schnare said. “It’s hard to modify a loan if the family doesn’t have a job to stay in that house.”
Schnare said there is better news for those looking for financing to purchase a home, as a result of the availability of the Federal Housing Administration's mortgage insurance program and government efforts to reduce mortgage interest rates.
The GSEs and the FHA “are more important now than ever before,” she said, accounting for virtually all of the current mortgage market.
“The FHA is the only game in town,” she added, for prospective home buyers who want to take advantage of notable improvements in housing affordability at a time of higher downpayment requirements and tighter underwriting standards for conventional financing. The FHA’s market share has climbed from roughly 3% in 2005-2006 to about a third by the end of last year, she said. As a result, the agency will need more staff and processing capability.
Schnare also noted that the surge in mortgage refinancing brought on by the reduction in interest rates is providing more stimulus to the economy than many government programs that were conceived for that purpose.
The losers in the current market, she said, are those seeking jumbo mortgages, which are only available from the private sector and only being made to those who can come up with substantial downpayments of at least 20% to 25% and have sterling credit histories and sizable amounts of money in the bank. The interest rates on jumbo mortgages have been running about 140 to 150 basis points higher than the cost of conventional loans, she said.
“This will be a factor in retarding the housing recovery” in high-cost housing areas, she said.
Affordability a Positive
John Burns, president of John Burns Real Estate Consulting, said that an immediate challenge for home builders is getting the attention of “consumers who can buy a home but aren’t even looking right now” because of fears of holding onto their jobs.
“Affordability is a real positive” in the current market he said, and builders should be advertising the decline in the monthly payments on their homes. For example, in Phoenix, buying a home can now cost $800 a month, compared to a $1,100 monthly cost of renting.
Burns voiced optimism that the housing industry is just about ready to stage a recovery, which will begin once the volume of resale listings is pulled down to normal levels — probably at the end of the year. Resales still continue to slide in Florida and the Carolinas, he noted.
Washington, D.C.; Sacramento and Oakland/East Bay, Calif.; and Dallas/Ft. Worth already appear to be in the early stages of recovery, he said.
Among markets that Burns said have already hit bottom and are likely to be among the first to come out of the slump are: Atlanta, Phoenix, Denver, San Antonio, Chicago, Las Vegas, Houston, Denver, Minneapolis, Bellevue, Wash. and Southern California.
Burns compared today’s housing recession to the four-year downturns that hit Houston in the early 1980s and Southern California in the early 1990s. “We are now in the midst of year four,” he said, “and then we’ll claw our way back.”
Preparing Businesses for the Recovery
With signs suggesting that housing is in the “very, very beginning of recovery,” Boyce Thompson, editorial director of the Builder Group of Magazines, suggested that now is the appropriate time for builders to recreate their businesses even as they continue to keep an eye on improving their cash flow and keeping expenses down.
Worth considering, he said, are business models that worked and best prepared builders to weather the downturn. These included such practices as:
- Relatively difficult infill and tear-down activities that came out better because they were more competitive with existing homes
- Keeping land holdings to a minimum
- Not building on spec
- Building on owners’ lots, also difficult
- Not selling to investors
- Finding alternative sources of long-term equity and capital — such as community banks, pensions and life insurance funds, joint partnerships and limited partnerships with friends and family
In the emerging housing market, Thompson said, home buyers will be more cautious and value-oriented; and they will be shopping for smaller, more flexible homes.
Among the findings of a recent Builder survey of prospective home buyers, he said, 60% of the respondents strongly agreed and 21% agreed with the statement, “I don’t want to stretch my finances too much when buying a home.”
Ninety percent of those surveyed said that the community was more important than the house, and two-thirds indicated they would accept a smaller home in order to live in the community they wanted.
Photos by Herman Farrer
Tax Credit Web Site Looks at Opportunity of a Lifetime
Builders and other industry professionals can help spur home sales by referring prospective first-time home buyers to www.federalhousingtaxcredit.com. The NAHB Web site provides detailed information on the $8,000 federal tax credit for first-time home buyers included in the economic stimulus legislation signed into law by President Obama.
Consumers can use the Web site to find information on the tax credit — including a detailed question and answer section. It also includes information about other housing-related and small business measures in the legislation and a number of home-buying resources for consumers.
Spanish Version Also Available Online
A Spanish version of this increasingly popular Web site is also available to provide detailed information on the tax credit to Spanish-speaking first-time home buyers.
Industry professionals are encouraged to highlight either tax credit Web site when marketing to their potential first-time home buyer market.
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