by Steve Harney on April 12, 2010

The big question we seem to be getting as of late is whether or not a housing recovery will be coming by the second half of 2010. Today we asked Steve Harney to list five areas that will affect the two main components of a housing recovery: housing supply and demand. When aligned, these two components will bring price stabilization.

 -The KCM Crew

Unemployment, Mortgage Interest Rates, Distressed Properties, Gov’t Intervention, Prices 

There are many pieces that determine every market, and real estate is no exception. Knowing which keys will determine the future is no easy task. Today, I will list what I believe are the five major factors in real estate throughout the rest of 2010.

Unemployment

Recently we posted a blog on the impact unemployment (or underemployment) has on the housing sector. We explained that there were two distinct affects:

  1. Obviously an unemployed person cannot purchase a home. Demand for housing will remain muted as long as unemployment remains high.
  2. When a wage earner in a home loses their job, it increases the chances that the family can no longer afford to pay their mortgage payment. Once a family falls 90 days behind on the payment, there is less than a 1% chance that they will ever catch up. There are more and more households that will face foreclosure or a short sale as long as unemployment remains high. This will increase the supply of distressed properties coming to the market.

Outlook for the second half of 2010:

Less demand and more supply can only mean continued downward pressure on home prices.

Mortgage Interest Rates

The Fed has decided not to extend their assistance in the mortgage markets. Many experts feel that will cause mortgage rates to rise quickly and dramatically. As Housing Wire reported last week:

Mortgages need to be originated at roughly 6% at least to get any sort of capital flow; this was the case in previous securitization efforts, and its likely true now as well.

In the last week, rates have already jumped one quarter of a point. When rates increase two things happen:

  1. Less people qualify to purchase a home
  2. Those that still qualify decrease the price of the home they purchase so the monthly cost will remain the same.

Outlook for the second half of 2010:

Anything that has a negative impact on demand lengthens the time to recovery.

Distressed Properties

The long anticipated surge of foreclosures is upon us. Banks are letting us know that the time has come for them to start releasing their foreclosure inventory to the market.

As an example in a post last week, the Irvine Housing Blog reported:

The west coast manager of real estate owned, Senior Vice President Ken Gaitan, stated that Bank of America, which currently forecloses on 7,500 homes a month nationally, will increase that number to 45,000 homes per month by December of 2010.

Our best hope is that the current short sale plans being instituted by the government (HAFA) and the private sector will be successful. A short sale has a much less severe impact on the value on the other houses in a neighborhood than does a foreclosure.

I believe both the increase of distressed properties and the timing of their release to the market will be the biggest real estate story of 2010.

Outlook for the second half of 2010:

Anytime the supply of an item increases and demand remains flat, pricing is adversely impacted. This supply will come at discounted prices (foreclosures at about 50% of value, short sales at about 70%). Its impact could be substantial.

Government Intervention

The administration has already exited its program which allowed them to purchase mortgage-backed-securities and it seems likely that there will be no extension of the Home Buyers Tax Credit.

The only appetite the government seems to have left regarding the housing market is in the form of modifications. Their new HAMP enhancement program which concentrates on the unemployed and those with negative equity seems to make sense.

However, the original plan was supposed to help 3-4 million American families save their house from foreclosure. A year later less than 200,000 have received a permanent modification. The sheer number of people in need might be too much to manage.

Outlook for the second half of 2010:

If you are a strong believer in miracles than you might hold solace in the new modification programs. If you are more of a historian, you know that, at best, mod programs in the past have only helped delay the inevitable.

Prices

Most experts have always used pricing as a key indicator to determine the recovery of any market. Real estate is no exception. I personally believe that pricing does not change until after the market recovers. However, for the sake of this blog, let’s go with the experts.

We had seen a stabilization of pricing as we finished 2009. Many people jumped on that data to pronounce a recovery in the housing sector. Most recent data, however, suggest that prices are again softening and many are predicting price declines from anywhere from 5-20% off current values.

As Housing Wire reported last week:

After nine months of quarterly gains, US home prices dipped 3.9% from January to March as real-estate owned (REO) property takes more of the market, according to the Clear Capital Home Price Index.

“Although yearly price changes remain positive compared to last winter’s lows, the most recent declines reflect the fragile and volatile state of many housing markets and could signal a trend to renewed lows off last year’s levels for several markets,” said Alex Villacorta, senior statistician at Clear Capital.

I believe that if we are to use pricing as a key indicator than 2010 will not be the year the industry recovered.

Outlook for the second half of 2010:

Prices will continue to decline throughout 2010 as demand wanes and the supply of houses on the market increases – perhaps dramatically.

http://kcmblog.com/2010/04/12/the-5-keys-to-a-real-estate-recovery/