BluefoxToday blog : John Mulkey, Housing Guru (TheHousingGuru.com)

We’ve all heard the news reports about the potential for a double-dip in housing, and perhaps, the overall economy. Unemployment seems out of control; debt levels are becoming unmanageable; and many are wondering what the future holds for the housing market. Where home prices going and what is the potential for prices to recover to the levels of 2005/2006?

There are lots of opinions, but here are some points to consider:

● The recent meeting to discuss the future of housing, including the GSEs Fannie and Freddie, while generating lots of news, was not expected to produce anything of significance that would improve the situation in the short term. The billions of taxpayer liability associated with Fannie and Freddie—extreme “worst-case” estimates range as high as $1 trillion—cannot be erased. And if the structure of these entities is significantly changed to remove risk to taxpayers, interest rates will increase and home sales will suffer.

● According to many experts, structurally high unemployment will be with us for years. And, those without jobs or who are underemployed lack the financial ability to purchase homes. New home sales follow the employment rate, and with the permanent loss of millions of manufacturing and other jobs, millions of potential buyers have been removed from the housing market.

● Monetary policy seems confused at best. With disagreement from both inside the Fed as well as among some inside the administration, there seems little doubt that the “green shoots” once reported, have faded and died. Printing money on a massive scale ultimately leads to inflation; and borrowing and spending has left us deeply in debt, so deeply in fact, that in less than eight years interest on the national debt will equal $1 trillion, the largest single budget item—and a good portion of those dollars will be paid to bondholders in China.

● In the first quarter of 2009, almost half a million small businesses (less than 100 employees) closed their doors, costing about 1 million jobs. In a struggling economy, such job losses will continue, removing a significant segment of new home buyers from the marketplace.

● The latest foreclosure numbers show that they are spreading into the heartland. While much of Middle America and the northwest had avoided the worst of the problem, default notices have recently increased significantly, with more than a third of the states experiencing a doubling of foreclosures.

Those who are unwilling to face the reality that the U.S. is in serious economic trouble and that our “leaders” seem unable or unwilling to take the steps necessary to bring about a recovery, may ignore the facts, but that doesn’t change them. And while economic conditions vary dramatically from one part of the country to another, the economy in general is very ill, and the experimental “medicines” that have been administered have brought only temporary relief. A long-term cure must be proposed, yet many economists and political observers see that as unlikely.

Proponents of an additional and perhaps larger stimulus have pointed out that current winding down in the economy is due to the effects of the first stimulus wearing off. What they seem to ignore is the very real fact that a temporary stimulus provides only temporary relief. The original stimulus, just like Cash for Clunkers and the Homebuyer Tax Credit, did little or nothing to create sustainable economic improvement. Such artificial measures do little other than to provide politicians with quick, feel-good results intended to demonstrate their commitment to solving the problem; and feel good solutions never last. It’s time to wean our “leaders” and our citizens from the belief that success must be measured in short term results.

So, where are home prices going? Is recovery just around the corner? No. Many years will pass before homeowners feel that the housing market has recovered; and the ensuing period will be fraught with uncertainty and additional foreclosures. The expectation that home values will quickly return the their recent highs or that prices must continually increase will be replaced by the reality that prices, in general, will follow the rate of inflation. To do otherwise would mean that homes would soon be beyond the reach of the average buyer. That’s the reality, and that’s where home prices are going.

The Housing Guru: the expert source for all your housing questions

The constant stream of news stories about foreclosures, increased housing inventory, and the virtual collapse of home builders’ confidence may foretell a disturbing trend; and the negativity associated with housing could impact the market for years. Once seen as a solid investment, residential real estate has lost its allure for those who saw it as an effortless means of enhancing retirement savings. However, with an economy still struggling to come out of the worst recession in three quarters of a century, many have changed their opinion.

Having lost much of its perceived investment potential, housing must now rely to its emotional appeal—a place to create memories grounded in the concepts of home, stability, family, security, and sanctuary. Not to be scoffed at, many find such values to be worth far more than financial considerations.

However, we all have differing needs and perceptions; and the perception de jour seems to be that housing is a bad investment. And when analyzed purely for investment potential, housing often comes up short. While some tout the true values of home ownership, large numbers remain skeptical, remaining on the sidelines, anticipating that magical moment when stabilization returns to the housing market.

With long-term unemployment at record levels, consumer confidence shaken, and an awareness of the significant declines in home prices, residential real estate could be in a long-term struggle as the negativity associated with housing could impact the market for years.

The Housing Guru: The expert source for all your housing questions

As the housing market continues to struggle, with taxpayers carrying much of the burden for defaulting mortgages, many are asking: Is there a future for Fannie and Freddie? And eighteen months after their takeover by the government, Treasury has yet to propose an answer.

When the housing market crashed, it took down the GSEs, Fannie Mae and Freddie Mac, the mortgage giants that, at the time backed about a quarter of U.S. mortgages. Now, however, after less than five years, and because of the contraction of the private mortgage market, their portfolio has grown by almost 150 percent encompassing about two-thirds of all mortgages. And since the government virtually owns Fannie and Freddie, the U.S. taxpayer is on the hook for losses.

Just last year the regulatory limit on losses of both Fannie and Freddie was increased to $200 billion each. Later, the government agreed to provide unlimited financial support, a commitment that some have projected, could put taxpayers at risk for losses of almost $1 trillion.

A conference to be held on Tuesday of this week will discuss the options and future direction of the GSEs in an attempt to stabilize both housing and the two mortgage giants. Most agree, however, that a transition must be gradual in order to avoid further shocks to housing; but there seems to be little agreement upon a strategy or the extent of the changes.

One option would create a co-op between several of the largest lenders with each owning a portion of the new entity; and the government would be required to furnish insurance on the mortgages. Such an arrangement appeals to some, as it would remove much of the risk to taxpayers and would encourage the participating lenders to monitor the quality of mortgages being supplied by the others.

Others have suggested that Fannie and Freddie be broken into several smaller, competing operations. A few have even recommended a permanent nationalization of the GSEs. Then, of course, the big banks have their own ideas.

Is there a future for Fannie and Freddie? While the outcome of the conference and ultimate legislation may be uncertain, we can be sure of one thing; the banking and housing lobbies will have a powerful influence. And lawmakers, forever a slave to lobbyists’ wishes, will see that the special interests, not consumers, are protected. That’s the way politicians seem to work, and their record in protecting Main Street during this crisis has been nothing short of abysmal.

The Housing Guru: The expert source for all your housing questions

The effects of the recession and the dramatic declines in home values have caused lenders to price their REO inventory and short-sales at below market prices, so how can sellers price their homes to compete with foreclosures and short sales? Both homeowners and builders are facing stiff competition from lenders, and their options are few.

However, while sellers’ options are limited, they’re not nonexistent. Of course conditions vary around the country, but I’m addressing those areas where sales are sluggish and competition is fierce. There are three steps that I consider essential for those who must sell their home.

● Price the home below market. If you cannot afford to do so, you’re probably not going to sell, unless perhaps through a short-sale. Proper pricing is essential; and an experienced agent can help guide you in setting the price. Most homeowners believe their home is worth more than their neighbors—they have a bigger/better kitchen; they’ve upgraded some features; their home is better maintained; they always win yard of the month—but the reality is that buyers are expecting to find a great bargain. If they don’t perceive your home to be in that category, most will just move on. CLICK for more info.

● Unless your home is professionally decorated, hire a home stager. While sellers often feel it unnecessary or too expensive to employ a stager, doing so can make your home memorable and sets it above the competition; and it can make sufficient difference to generate a sale. And even if you regularly receive compliments on your decorating prowess, consulting a home stager is worth their fee. CLICK for more info.

● Recruit the best agent in your area to list your home. Don’t think you’ll save money by avoiding paying a commission, and don’t think buyers will flock to your home to reap the financial benefits of a FSBO (For Sale By Owner). In the real world of real estate, it rarely happens. Do your homework and enlist the services of an experienced and professional agent; your home will be exposed to more buyers, making a sale much more likely. CLICK for more info.

Of course doing the above cannot guarantee a sale, but ignoring them could keep a home from selling. The housing market varies dramatically from one area to another; being aware of local conditions and tailoring a marketing plan for the specifics of your area will help generate buyer interest and hopefully, a signed contract.

The Housing Guru: The expert source for all your housing questions

An interesting look at the historic impact of residential investment on GDP has been posted on Calculated Risk Blog. The post includes this graph with comments on the analysis. What the graph shows is the disturbingly serious decline in total residential investment during the current recession. And if when one projects through the end of the current year and into the future, it seems obvious that housing will not be the engine that lifts us out of this recession.

Graph courtesy of Calculated Risk Blog.

The Housing Guru: The expert source for all your housing questions

While the recent Banking Reform Bill was touted as a means to prevent future financial crises, a little-known amendment offers a helping hand to unemployed homeowners. With HAMP and other foreclosure relief efforts intended to help working homeowners, they offered little to the millions of unemployed who fail to qualify for a loan modification.

The new program will be administered by HUD, the Department of Housing and Urban Development; and while the details are yet to be announced, the bill includes as much as $1 billion to be used to help those without jobs make their monthly mortgage payments. And with unemployment remaining abnormally high, the funds will provide a “safety-net” to many homeowners who might otherwise be forced into foreclosure.

The current recession has been exceedingly difficult for millions across the country, and there are many who legitimately need the assistance offered. However, $1 billion isn’t much when spread across the millions of unemployed. I would hope that HUD does an effective job of distributing the funds and insures that money not go to dead people, those in prison, or those who do not own homes, as was recently the case with the Housing Tax Credit.

The Housing Guru: The expert source for all your housing questions

An article in the Wall Street Journal, Housing Market Stumbles, describes how home sales seem to be deteriorating, but it isn’t just a stumble; the housing market has fallen and won’t get up. The WSJ piece projects the dreaded “double-dip” in housing, a prediction that has grown more popular in recent weeks.

What most seem to overlook, however, is that the fundamentals of housing are being rearranged. The overall market was never truly in recovery; the brief periods of upward momentum were, in general, a response to an artificial stimulus applied by government—a stimulus which was neither permanent nor productive.

With the numbers of new home starts falling, with housing inventory rising, and with the potential for several million additional foreclosures, the housing market is entering a new phase where the old rules no longer apply. Past statistics regarding recovery from recession are meaningless, for the current recession has little in common with those of the past. And those who have homes to sell, those who wish to purchase a home, and those in real estate related businesses must adjust to the fundamentals of this market.

While some areas of the country have seen improvement—markets in the northeast and parts of California—other areas, especially those with the potential for additional foreclosures, are still experiencing weak demand and falling prices. Those needing to sell their home will have to market and price more aggressively; prepare for a longer period on the market; and will have to be flexible to micro-changes in their market.

An anemic job market, expected to continue well into the decade, has changed housing for the foreseeable future. And those areas with double-digit unemployment can expect additional price declines. Nationwide, prices should remain well below the levels of recent years; and, with few exceptions, appreciation will be minimal.

What we’re experiencing is not a double-dip in housing, not a “stumbling,” but a market experiencing a fundamental adjustment downward. With the current and projected absorption rates, we’re likely to have high levels of inventory for several years; and if we add in the indeterminate number of future foreclosures, structural and fundamental changes seem unavoidable. The potential inventory of homes must decline to levels appropriate for the current and anticipated absorption rate—an event unlikely in the short term—in order to begin a recovery; and until that occurs, the housing market has fallen and won’t get up.

The Housing Guru: The expert source for all your housing questions

In an indication of continuing troubles for the housing market, numbers just released from Lender Processing Services (LPS), show the total number of foreclosures and delinquencies increasing. Today’s release of its May Mortgage Monitor report shows a 2.3 percent month-over-month increase in the nation's mortgage delinquency rate with a year-over-year increase of 7.9 percent.

The report also shows mortgage defaults beyond 90 days as well as foreclosures experiencing a slight increase, with both rates elevated to historically high levels. As of May 31 there were more than 7.3 million loans delinquent or in foreclosure. Additionally, the numbers showed that the cure rate for loans in default has declined while the rate of deterioration has increased, with 2.5 loans getting worse for each one that improves.

Finally, the report shows a potential increase in shadow inventory as lenders are now taking an average of 449 days to move a loan from 30 days delinquent through foreclosure. For the full report click HERE.

The Housing Guru: The expert source for all your housing questions

A bill just introduced in the Senate would extend the deadline for the Housing Tax Credit by 90 days, according to an ARTICLE in The Washington Post. The bill, supported by the NAR, would grant those already under contract and extra three months to get their deal closed. Many lenders, suffering from an overload of mortgage applications, had indicated that some loans would not be ready to close by the original deadline of June 30.

The NAR has estimated that as many as 180,000 applicants under the original deadline would be unable to close. While the NAR and mortgage lenders may be accurate in their estimates, many, including myself, feel the concept of a Housing Tax Credit was flawed from the beginning, and do not support an extension, which would probably encourage additional fraudulent applications and back-dated documents.

The Housing Guru: The expert source for all your housing questions

With approximately fifteen million homeowners owing more on their home than it is worth, employers are finding it more difficult to transfer or recruit from other areas of the country. Held captive by mortgages that are near or exceed their home’s value, large numbers of workers are turning down promotions and forgoing job offers that would require the sale of their home.

Companies unwilling to make a substantial contribution towards a “relocation package” may find themselves limited to local talent; but some have begun to adjust their policies to reflect the reality of a housing market going nowhere. An article in The Atlanta Journal-Constitution describes the cold, hard facts that both employers and workers are facing.

With the economy still far from recovery and with first-rate talent abundant, companies looking to hire or relocate employees have taken a more aggressive position in assisting with the real estate component of the process. And while millions of workers remain trapped by the current housing crisis, the possibility of relief offers at least a bit of hope.

The Housing Guru: The expert source for all your housing questions