Call it a housing recovery, but not a boom

Bankrate.com

U.S. housing markets are in a recovery. But the rebound from the depth is modest, and how long the housing recovery will last is anybody's guess.

Evidence of an upswing is so plentiful that Rick Sharga, executive vice president of Carrington Mortgage Holdings, a real estate company in Aliso Viejo, Calif., says "virtually every metric" points to a housing recovery.

Specific numbers vary, as always, from one month and one locale to the next, yet it's clear that, on a national basis, sales of both brand-new and existing homes are up, prices are up, residential building permits are up, and sales of bank-owned foreclosure properties are down.

"A market that was at an incredibly low point has stabilized and is showing signs of getting better," Sharga says. "But it's all relative. We're not looking at a boom. We're looking at a slow and steady recovery."

Risk factors

That caution stems in part from a few "hidden aspects," to use Sharga's characterization, that lurk with the flurry of positive numbers.

One concern is all-cash, investment-oriented buyers purchasing homes to hold as rental properties continue to close a large proportion of home sales transactions. An investor-driven recovery isn't problematic in and of itself, but Sharga questions whether the current momentum can be sustained without a resurgence of traditional first-time and move-up homebuyers, who historically close the bulk of home purchases.

"Your average homebuyer really hasn't come back into the market in a meaningful way," Sharga says.

Another concern is that upticks in building and foreclosure activity on the supply side could create a significantly larger inventory of for-sale houses a year or so from now. That "could have an impact on pricing," Sharga suggests, if more traditional buyers don't return to the market to snap up those additional homes.

Two other cautionary notes are an unusually high number of pending sales that don't close due to appraisal or buyer financing problems and persistently high unemployment. Housing isn't likely to truly take off until the national jobless rate drops to less than 6.5 percent, Sharga suggests.

"Housing is trending in the right direction," he says. "But we have to recognize it will take several more years to work through the backlog of distressed inventory and for borrowers whose credit has been impaired to be able to come back as buyers."

Mix of sales

The massive California housing market has all those positive and negative characteristics. But the key factor this year has been a dramatic drop in sales of bank-owned foreclosure houses. These so-called real estate owned, or REO, properties made up more than half the state's sales in 2009, but comprised only about 10 percent to 15 percent of sales in recent months, according to Leslie Appleton-Young, chief economist of the California Association of Realtors in Los Angeles.

The interplay of REO sales, short sales and traditional equity sales "really tells the story of the recovery in the California housing market," Appleton-Young says.

Yet again, there is a constraint, which is that people who have cash and healthy credit are able to buy, but others are being kept out.

"People who are in a position to take advantage of the market today are doing so because properties are affordable and if they need a mortgage, the rates are very low," Appleton-Young says. "The lack of jobs is keeping people out of the market -- people who don't have a job, can't get a mortgage, don't have a down payment."

Better appraisals

The recovery is being felt in local markets, too.

Rob McAllister, a mortgage broker at West Seattle Mortgage, says homeowners who want to refinance are seeing higher valuations, and for-sale homes are attracting multiple offers.

"Homes are starting to appraise for more than (the owners') estimates, which is a good indication that the housing market -- at least here -- has improved," McAllister says.

He attributes the recovery to classic economics: Fewer new houses are being built to shelter an increasing number of people.

"When you have a complete stoppage or significant reduction in construction and you continue to have population growth, you have to house those people, so prices are going to go up," he says. "It's supply and demand."

Home loans

The recovery presents opportunities for buyers and sellers in the near term. But Appleton-Young also says the future of Fannie Mae and Freddie Mac bears watching by those whose plans are further out. Fannie and Freddie are federal government-controlled companies that buy bulk batches of home loans from lenders to create liquidity in the mortgage market.

"We don't know what the plan is toward the secondary mortgage market," Appleton-Young says. "We know Fannie and Freddie are shrinking. We know it's going to be different. But we don't know the plan or the trajectory."



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