Morality and Mortgages

By Homer Guthrie

Expert Homeowner

So I was reading in the newspaper that now there’s a government program where I can refinance and get a cheaper rate even if I’m deeper underwater than the Titanic.  Which I am.

I called the first mortgage guy who found in my spam file on my email and he was happy to hear from me.  He told me that it was called HARP 2.0 and that I qualified since Freddie Mac owned my mortgage.  Isn’t that something? You learn something new every day.

Except there’s a problem, he said.  “You’ve been paying your mortgage on time.”

He was the first mortgage person I had ever talked to who agreed with me.  For ten YEARS I’ve been paying the mortgage on time.  When Countrywide and Washington Mutual bailed out after ripping off thousands of borrowers, I paid my mortgage on time.  Goldman Sachs and Lehman Brothers can go bankrupt , but not me.  First of the month and my check is in the mail.

I didn’t think it was fair but Felicity, my wife, said that just because those companies were bums didn’t mean we should be.  We had to set a good example.  (For who, I wondered, since the kids are grown.)  And then there’s our credit in case we want to buy something, she said.   (And you-know-who frequently does.)

So she found some government bureaucrat somewhere on the Internet who said we have a moral imperative to pay our mortgage no matter what.    He was probably the same guy who invented HARP 2.0.  Just like the government to put out a press release about a great new program and then tell honest working people who pay their mortgages on time that it’s not for them.

“Moral imperative?  You’ve got to be kidding,” I said. “There wasn’t much moral imperative going around when all those people got sold subprime loans they couldn’t afford.”

But I wasn’t worried.  I had a real live mortgage EXPERT who agrees with me.  You need to quit paying your mortgage for three months before you can get into the HARP program, he told me.  The mortgage expert said the program was for people who were having a hard time paying their mortgages.  I figured I qualified.  Writing that check every first of the month is awfully hard on me, that’s for sure.  I wasn’t alone.  He said he had lots of other customers like me who weren’t behind on their payments until they talked to him.  Then they wised up and got cheaper mortgages.  Sounded good to me, but Felicity hit the roof.

“That’s crazy,” she said.  “What happens if we don’t get approved?”

“That’s an easy one.  We save three months of mortgage payments.”

“No we don’t, you dunce. We will still have to make those payments plus interest and we will probably lose one hundred points off our credit score.  Besides, it’s the right thing to do.”

So I did a little more research about this moral imperative thing, which wasn’t very hard.  What about the government itself?  Does the local tax assessor’s office feel a moral imperative to lower your property taxes pronto when home values take a pasting?  I don’t think so.  Who cares if suffering homeowners have to keep paying property taxes for years as if they lived in mansions when Zillow values their home as if they were rotting foreclosures?  When they finally get around to lowering assessments, they raise taxes somewhere else to make up the difference-like it’s our fault that home values tanked.

“So you’re going to stop paying our taxes too?” asked Felicity.  “Good luck with that.”

Well, then I found out that there are thousands of people just like us could care less about their moral imperative.  They are walking away from their mortgages because continuing to pay them is just throwing good money after bad.  They even have a name for it.  It’s called “strategic default” and there’s even a college professor in Arizona who says it’s the right way to go.

Felicity laughed at that one.  “When we lose our home can we move in with the professor?  He probably lives in a trailer park in the crappiest part of Tucson.”

It was clear she didn’t have an open mind so I decided I would find a way to prove to her that forgetting about moral imperative now and then just isn’t such a big deal.  Credit cards came to mind.  I never could figure out what I got in return for the money I sent in every month to credit card companies so I stopped paying one of them.  As soon as the due date passed, they started calling and emailing like I was a long-lost relative.  At first they said patronizing things like “we’ve always treasured our relationship with you because we know you are a coward and pay on time.” As time passed, they got meaner.  They sent me big ugly envelopes plastered with black type that said “OVERDUE” and “ACCOUNT SUSPENDED” just to embarrass me in front of my mailman.  When they called, at first they were nice people in India with lilting accents like in Bollywood movies.  After I was 60 days past due, the robo-call machines called incessantly.  At 90 days, Felicity found out about my little experiment when her card was rejected at Kmart.

Felicity was so mad at me that she nixed the whole HARP thing and ordered me never to talk to my mortgage friend again.  So it was no surprise to me at all when I read in the paper the other day that the HARP program wasn’t getting many takers.  The article said the experts couldn’t figure out what the problem was.  How could so many homeowners pass on such a great deal, they wondered?

Well, duh.  I’m an expert homeowner and take it from me, all they need to do to make the program work is get rid of this moral imperative thing.  In fact, if Congress would just pass a law saying morality and mortgages make about as much sense as morality and politics, we probably wouldn’t have a housing problem at all.

Read House Poor every Monday on Real Estate Economy Watch.

To contact Homer or to inquire about posting House Poor columns on your site every week, write him at admin@realestateeconomywatch.com or post a comment.

Copyright 2012 by Reecon Advisors LLC. All Rights Reserved.

Neighbors. Can’t Live Without ‘Em.

By Homer Guthrie, Expert Homeowner

Neighbors are like apple cider. When you first move in, they’re nice and sweet. That’s because they will want to borrow something someday, or ask you to take in the mail when they go on vacation, or baby sit in a pinch. They act friendly but they are really just checking you out.

After a while neighbors get fizzy and sour like cider that’s turned. I mean, was it my fault the dog preferred their lawn to ours? And how was I to know that their kids were allergic to the poison ivy? We just grew a little bit to keep trespassers away and it worked pretty well.

I speak of my neighbors in the past tense because we don’t have them anymore. Most every house in walking distance is empty and has been for months. They’ve all been foreclosed. The families piled their belongings in U-Hauls and tearfully said good bye. Looks like they’ll stay empty for some time since it takes an average of 18 months to process a foreclosure in our state. For Pete’s sake, they built the Empire State Building in 18 months in the middle of the Depression.

Some wiseacre news person decided our neighborhood, Mirage Manor, was the worst in the region for foreclosures and then some big deal web site made us the reddest of all the red areas on its national heat map of foreclosure disaster areas. Wasn’t long before news reporters came around to cover what one of them called the “Chernobyl of American real estate.” The worst was a young radio reporter who breathlessly described everything she saw into her microphone. She made our neighborhood sound like Berlin after World War II, complete with graffiti, boarded up doorways, broken windows and waist-high weeds. She called our home “ground zero in the foreclosure plague” and “an island of homeownership in a landscape of tears.” I mean, really.

So when she knocked at the door, my wife Felicity invited her in for coffee, and she proceeded to stick a microphone in Felicity’s face.

“Mrs. Guthrie, tell me what your neighbors were like?”

“It’s very sad,” she said. “I miss so many of them. I used to baby sit for the Johnsons next door and we all looked out for each other the way neighbors do, you know.”

“And it’s such a pity that now that they are renters they won’t get their mortgage interest deductions next year.” I chimed in.

The radio reporter looked a little annoyed and turned her mike at me. “Mr. Guthrie, what’s it like having no neighbors?”

“Well, like everything else in life, it has its plusses and minuses,” I began. “It’s sure a lot quieter and now I can always park in front of the house, so I took down my “Anthrax Quarantine!! Park at Your Own Risk” sign. People don’t bother with our neighborhood any more. They don’t come to the door to pray for us and ask us to join their church. We save money on Halloween candy. And I haven’t run over a tricycle in months. Minuses? Well, I guess the biggest thing I miss is not having anyone to borrow tools from, which is actually not such a big deal. All our ex-neighbors left in such a hurry that I guess I forgot to return a bunch of stuff. I’m pretty well stocked for the duration.”

She decided to give me another chance to say something she could use. “Mr. Guthrie, perhaps you can tell us why you think you and your wife are the only homeowners to survive in this neighborhood?”

“Sure, that’s easy. You see, we’re both expert homeowners.”

The reporter looked amused. “Expert homeowners? What makes you an expert?”

“Well, for one thing, at this point our mortgage guy-his name is Earnest S. Crowe-knows he’d lose big time if he even thought about foreclosing on us. And we know that he knows what we know. See, we’re deeper underwater than the Titanic because we refinanced every chance we could in the good old days. When values sank, our lender ended up with all the risk. Homes in Mirage Manor are pretty much worthless. I mean, who wants to live in a place they call the Chernobyl of American real estate? If they were to foreclose on us, they would just add to their losses. Nor would it make any sense to make an example of us. There’s no one left around here who would notice. That’s how an expert homeowner would analyze the situation,” I said.

“What Homer forgot to mention is that the real reason we still own our home is that we pay the mortgage on time,” said Felicity. I frowned.

“I see,” said the reporter, who decided she’d had enough of us.

She only used a little bit of the interview, what Felicity said about our neighbors. Which is probably just as well. I’m hoping that I won’t have to give back the tools I borrowed.

About House Poor

Homer Guthrie is an expert homeowner who lives in Mirage Manor, a suburb known worldwide as the “Chernobyl of American Real Estate.” With his wife Felicity, who is also an expert homeowner, his real estate agent Bea Meriwether, and his mortgage broker Earnest S. Crowe, Homer tackles the tough issues in residential real estate in a weekly column called House Poor. Read House Poor every Monday on Real Estate Economy Watch.

To contact Homer or to inquire about posting House Poor columns on your site every week, write him at admin@realestateeconomywatch.com or post a comment.

Copyright 2012 by Reecon Advisors LLC. All Rights Reserved.

Why I’m an Expert Homeowner

By Homer Guthrie, Expert Homeowner

Hello. My name is Home Guthrie and I’m an expert homeowner.

Don’t you think it’s about time we had an expert homeowner? Everybody else has experts. We have expert economy-guessers with batting averages lower than a Little Leaguer and mortgage experts who sold loans that exploded like time bombs or put people in houses they couldn’t afford. We have expert real estate agents who can make any online listing make a house look like a palace with videos, color photos and crafty staging. In Washington, we have expert policy wonks who can send real estate markets soaring or crashing with a single confusing regulation.

So who died and made me an expert homeowner, you want to know? Well, for starters I live in Mirage Mills, a suburb better known as the Chernobyl of American real estate. We’ve experienced everything that’s gone wrong in the past ten years and I’ve had a front row seat for all of it: funny loans that a monkey could get, prices so ridiculously high that futures exchanges created housing contracts so traders could speculate on them, and then the bust came. We live at ground zero. Countrywide and Washington Mutual owned a major chunk of our homes but the foreclosure notices didn’t stopped arriving in our mailboxes after they went under. The government disappointed us with their learning experiences: HAMP, HARP, HEMP, HAFTA, HOFFA and the rest of them. When lenders were using robo machines to sign foreclosure papers for everyone else, in our neighborhood they just made a big X on the signature line and scrawled “his mark” next to it.

In Mirage Mills, we’ve seen the longest short sales and the shortest loan denials in history. Lending officers shudder when they get an application from our Zip plus four. Real estate agents want double their normal commissions to sell our homes. When buyers see homes in our area listed on line, they break into laughter. You get the picture.

So I’ve learned a lot. For instance, I know the exact time every month, the very last hour of the very last day (including leap years) that I can mail my mortgage check without getting a ding on my credit score. They’re not going to make one extra penny from me.

On those automated home valuation doohickeys on the big Internet sites I know how to jack up my home’s value. Believe it not, they invite you to report “improvements” to your property. Recently my home added two new bedrooms, a new kitchen for the wife, a pool, a backyard barbeque pit and a cabana for the pet pooch. The value is up 100k and I’m almost above water, on line at least. I even got a few calls from real estate agents who want to sell my house in spite of my address.

But when tax time comes round, we need to go the other way on the old house valuation thing. So every year I petition to get an onsite visit from an assessor. Before he arrives, I kick in a little dry wall, break a window or two, let the house get filthy for a month or two and spray the place top to bottom with some of that rotten smell spray you can buy at stores that cater to teen-aged boys who love practical jokes. Smells like hell but it clears out in a couple of weeks. Last year they shaved 40K off the top.

What really qualifies me as an expert homeowner, however, is my ability to comprehend and interpret for normal people like you the confused ramblings emanating from politicians, policy makers, economists, real estate big shots and bankers about what they have up their collective sleeves to make a buck off of normal homeowners.

They can get away with murder because they don’t speak the same language as the rest of us. They use words like “risk retention.” I’ve heard of water retention, but I don’t know anyone who retains risk. Another one of my favorites is “strategic default.” For the longest time, I thought that was what Patton did at D-Day. Then there is “REO.” No, that’s not the rock band. We could go on, but you get the picture.

Sometimes deciphering all this gibberish can be very important. Like, if you’re trying to sell your home and you hear on the news one day that prices are up so you kick up the listing ten grand but the next day, Mr. Expert Economist gets on the radio and says prices just went down. What to do?

Sit tight and don’t do a thing. Chances are they’re both wrong. If after three months the wife starts screaming at you because you haven’t had the slightest nibble, here’s a free tip from the ol’ expert homeowner. Call your agent to change your listing to say that Bernie Madoff slept in your house just before he went to jail and allegedly he hid two million worth of bearer bonds below the cement slab basement. No one has found them yet. Works like a charm.

Wait a minute, this isn’t all about me. I’ve got some terrific help. First there’s my lovely wife Felicity who, like her name suggests, is a happy and loving person who keeps me from screwing up too much. She’s also an expert homeowner like me. Then there is my real estate team. Bea Meriwether, my real estate agent. Her web site is uneedaplanb.com. Earnest S. Crowe is my go to mortgage guy who always has answers no matter ridiculous my questions might be.

So join me on House Poor every Monday morning and together we’ll try to make sense out of this mess.

To contact Homer directly, write him at suppot@reeconadvisors.com or leave a comment.

Copyright 2012 by Reecon Advisors LLC. All Rights Reserved.

Sales of existing homes registered 4.59 million annualized units in February, reflecting a housing recovery that began in mid-2011. Similarly, sales of new homes registered 313,000 annualized units in February, compared to 295,000 annualized units in July of last year. Home sales are firming as job growth has stepped up over the past half year. In addition, housing affordability remains high due to historic low mortgage rates, creating pent-up demand for homes. This provides a favorable long term outlook for future property values, creating opportunities for investors.

The current U.S. foreclosure situation has created unprecedented property acquisition opportunities. According to Realty Trac, about 800,000 properties went into the foreclosure process in 2011. I expect about 1 million residential properties will move from delinquency into REO in 2012, returning to levels experienced before the robo-signing slowdown. This should keep property values down for investors seeking discounts on foreclosures and short sales throughout most of this year. The combination of distressed property price discounts in the near term, relatively strong rent growth and improving property values (due to improving housing conditions) in the longer-term, bodes well for residential property investors.

Regionally, Florida’s housing situation represents one of the most favorable residential property investment markets in the nation. Many existing Florida homeowners possess underwater mortgages and have struggled to stay current on loan payments. This has generated a serious distress property sale situation in Florida- perhaps even worse than the dire foreclosure situations in Arizona and Nevada. In addition, Florida has a large backlog of foreclosures because the foreclosure process takes longer in Florida than it does in most other states.

Florida home values have plummeted almost 50 percent since the meteoric highs of the housing boom in the mid-2000s. Since Florida is a primary “destination” for baby boomers seeking retirement/vacation homes, the outlook for long-term property demand is favorable. Florida property values are projected to stay depressed or just modestly rise over the next year. However, when Florida’s foreclosure situation bottom’s out, relatively strong housing demand due to the state’s “destination” tag, is expected to raise home values over a longer-term investment horizon (5 years and greater).

Looking forward, the outlook for our nation’s housing markets is brighter than it has been for some time, but the housing recovery will proceed at a slow pace. The upward trend in existing and new home sales over the past six months has been modest relative to the plummet in sales between 2005 and 2009. Downside risks for housing are lessening, but high gas prices, troubles in the euro zone, and the potential for rising mortgage interest rates still muddy the outlook. In summary, 2012 offers favorable investment opportunities to investors seeking competitive annual returns (rents) and significant price gains over a longer term time horizon.

Future success, as well as current survival, depends on your ability and capacity for change. Given the hesitancy of households to purchase real estate today in many towns and cities across the nation due to depressed market conditions, a commonsense strategy for agents is to initiate long-term professional and revenue growth. Over the years, the “client for life” phrase has been overstated and under-employed by agents and pundits alike. However, it’s obvious to me that a client-based” sales approach would outperform today’s popular “customer transaction” sales approach over a reasonable amount of time and if given the opportunity. No doubt, agents would quickly recognize the professional value of employing the long-term, proactive, client-based approach to the development of an ever-expanding client base.

I’m not suggesting that agents dive into a client-based sales world head first; gradually integrating a client-based strategy while focusing on customer transactions makes sense. In fact, you don’t have to drop current customer sales to integrate a longer-term view of current client sales. Both methods are compatible and easily implemented in tandem. In fact, the client sales approach supplements your current-customer sales business model.

The client-based approach serves clients for life, rather than abandoning buyers and sellers once the real estate transaction is complete. Instead, you become a trusted advisor who provides services and guidance whether a past client is involved in a property transaction or not.

With a dual sales approach, agents focus on earning money today and securing clients for the future. Agents manage current customer transactions while maintaining a loyal client base because the time and cost involved in managing clients is minimal.

This is part one of a series of articles on Client versus Customer Sales Models for real estate agents.

Existing-home sales fell by 3.8 percent in May compared with April to an annualized 4.81 million units. The decline in sales was broad-based across regions, with only the West not exhibiting any change in sales. The months supply of homes available for sale to 9.3 in May from 9.0 in April. Similarly, new home sales fell 2.1 percent in May to 319,000 annualized units.  It is obvious that new home sales have been scraping bottom for the past 6 months. However, compared with one year ago, new home sales are up 13.5%. The months supply for new homes declined to 6.2 in May from 6.3 in April. The number of new homes available for sale has fallen to a new low of 166,000 units. The data extend back to 1963.

On a brighter note, new residential construction rose 3.5 percent in May to 560,000 annualized units but is still down 3.4 percent from one year ago. Total permits registered an 8.7 increase in May to 612,000 annualized units.

Most of the leading indicators for home sales were also down. The purchase index for mortgage applications was down 2.3 percent from a week ago and the index has hovered below 200 for the past several months. A purchase index below 200 indicates weak housing demand. Similarly, the pending home sale index plummeted 11.6% in April from the level in March. The data reflect contracts and not closings, which normally occur with a lag time of one or two months. Pending home sales are 26.5% below April 2010, a period coinciding with the end of the second homebuyer tax credit.

Finally, the Case-Shiller Home Price Indices for both the 10- and 20-city indices have been trending down in recent months and are down more than 30 percent from their peaks. They are now just at their cyclical lows set in mid-2009.

So what do we make of today’s sluggish housing markets? Is there any hope that housing demand will pick up soon and lead a solid recovery?

First, there are reasons for the housing markets inability to jump start a recovery. Economic growth was slower than expected in the first half of 2011, largely the result of a number of special factors. Poor weather conditions in most of the nation inhibited construction activity, and higher energy prices restrained consumer spending, particularly on big ticket items such as homes and automobiles.

The second quarter was also soft due to poor weather; higher energy costs plus parts shortages (delaying U.S. production) caused by the Japanese disaster. In addition, the labor market has been a bit softer than anticipated; nonfarm payrolls increased by only 54,000 in May.

Combine a soft economy with falling home values, delays in foreclosure processing which are slowing the pace of distress sales that have become a large share of existing-home sales, and tight mortgage credit conditions and you have a recipe for anemic housing demand.

Looking forward, the near term outlook for housing remains dismal but the longer view is quite more sanguine. According to the leading indicators, home sales in June and likely July are expected to remain sluggish. We also expect home values, as measured by the Case-Shiller Home Price Indices-to continue to fall-probably another 5 percent-by the end of this year and into the early months of next year.

However, a modest housing recovery is in sight. I expect the U.S. economy to gain momentum in the second half of this year. The Federal Reserve promises to remain accommodative suggesting relatively low interest rates for the remainder of the year, keeping housing affordability at near record levels. Business profits are high and companies are expected to be more aggressive hiring workers in the second half. The negative impact of higher energy prices are behind us as well as the negative impact of the Japanese disaster.

Of course, downside risks exist and include: a failed debt ceiling agreement; energy prices rise again, fiscal problems in Europe worsen, to name a few. Notwithstanding these potential headwinds, consumer spending and confidence are likely to improve towards the end of this year. Further, job growth will pick up, housing affordability will remain high and the pipeline for distressed properties will eventually flow and decrease. All of these factors suggest an improved home sales outlook for the second half of this year and beyond.

I cannot stress enough that progress in the housing sector is measured in inches, not meters; small steps not big ones. Home sales are expected to gain some traction but one home at a time. As for home prices, oversupply and ongoing foreclosure problems weigh heavily on price pressures. House prices will lag this rebound by almost half of a year. It will take some time and price cuts to work through today’s excess inventory of non-distressed and distressed properties. Sometime in 2012, home values will reverse course and head north once again. But, even then, home prices will post only modest gains.

All three major housing measures-existing home sales, new home sales and housing starts– are exhibiting growing pains. Existing home sales fell by 9.6 percent in February, wiping out half of the slight gains that home sales made in the previous few months. The annualized pace for existing home sales in February stood at an anemic 4.88 million units.

Similarly, the demand for new homes remains alarmingly weak. New home sales fell in February to 250,000 annualized units, a decline of 16.9 percent from January. A meaningful part of this drop is likely due to harsh winter weather conditions throughout a large part of the country which discouraged home shopping. Nevertheless, new home sales averaged a depressing 286,000 annualized units over the last six months.

To make matters worse, new residential construction activity is not faring well. Housing starts plummeted 22.5 percent in February to an annualized pace of 479,000. A large chunk of this drop is attributed to multifamily starts, but single-family starts also fell by a solid 11.8 percent.

Indications from leading indicators for housing activity suggest the nation’s housing sector will continue to struggle in the coming months. Housing permits fell 8.2 percent in February from a month earlier, which means home builders will be digging fewer holes in the ground in early spring. The National Association of Realtors’ pending home sales index rose 2.1 percent in February compared to a month earlier but this gain only reversed part of the large decline experienced in January. The pending home sales index remains below its 2010 year-end level. So don’t expect a meaningful rebound in existing home sales anytime soon.

The Mortgage Bankers Association’s index of mortgage applications to purchase homes was down 4.7 percent in the week ending April 8. The purchase index is now 191.7 and has hovered below 200 throughout most of the year. Historically, a purchase index below 230 indicates weak home sales in the coming months.

Fortunately, the economic recovery shows signs of strengthening which could eventually provide a boost to a struggling housing sector. The labor market experienced two consecutive months of solid growth. Non-farm payrolls rose 216,000 in March after rising by 194,000 in February. The job sector is picking up momentum despite higher oil prices and worries about the Japanese and European economies. Many economic forecasts expect payroll employment gains to average at least 200,000 per month throughout the remaining months of this year. This pace should boost household confidence and consumer spending slightly. Any improvement in confidence and/or a household’s financial situation provides needed support for housing demand. Looking forward, the outlook is for continued gains in the economy, led by a stronger labor market.

Although the economy promises to provide support for the housing sector, many challenges remain before the housing markets enter full recovery mode.

There is reason to believe that recent slowing in the housing indicators is temporary. The combination of a growing labor force and high housing affordability offers solid support for future home buying.  In addition, restrictive mortgage credit conditions are expected to slightly loosen as the year wears on.

On the negative side, home prices are expected to drop further before stabilizing by the end of the year. This is due to a large number of foreclosures in the pipeline of banks. A meaningful number of distressed home sales are expected throughout the year, depressing home values. Further, many household balance sheets are plagued by negative home equity, making it difficult for these households to purchase big ticket items like automobiles and homes.

On balance, I expect home sales to gain momentum as we head towards the summer months. But truth be told, it is difficult to concoct a rosy scenario for the housing sector until downward pressure on home values subsides which will not likely occur until 2012.

The nation’s housing markets collapsed in 2007 and the U.S. financial system collapsed in 2008; both have been recovering ever since. The damage is well documented: two of the nation’s most respected investment banks, Lehman Brothers and Bear Stearns failed and the nation’s largest mortgage lender, Countrywide, went belly up. The two mortgage funding giants, Fannie Mae and Freddie Mac, were taken over by the federal government and are now under conservatorship. Goldman Sachs and Morgan Stanley sought safer harbor by becoming bank holding companies and the government bailed out our nation’s largest insurer, AIG, and then handed a bailout package to two of our largest automakers, General Motors and Chrysler. We’ve been in revival mode ever since, particularly the housing markets.

A host of housing stimulus and foreclosure mitigation programs was implemented during the past several years. FHA Secure, Hope Now and Hope for Homeowners, the Home Affordable Modification Program and the homebuyer tax credit and its extension, to mention a few; some were effective, some were not.

The U.S. economy was in recession throughout 2008 and the first half of 2009. The economy has gained momentum since but not nearly enough to generate healthy job growth to support a wholesome, growing economy; real GDP grew by only 2.6 percent in the third quarter of 2010, while unemployment posted a 9.4 percent rate in December 2010.

As for the nation’s housing sector, home sales plummeted by well over 30 percent over the past four years, while new residential construction plunged in excess of 65 percent over the same period. According to the Case-Shiller Home Price Index, home values fell over 30 percent for the nation as a whole during the 2006 to 2010 period; and is expected to fall further this year. Some metros like Las Vegas, Phoenix and Miami took it on the chin, with home values diving 55 percent, 46 percent and 42 percent, respectively during the same period.

Of course, foreclosures have been front and center in the housing markets during the bust years, attaining record filings and sales with each succeeding year. As of this writing, 1 out of 381 housing units are a foreclosure filing.  Five states account for over half of foreclosure filings: California, Florida, Michigan, Illinois and Arizona. With mortgage delinquency rates hovering near record highs, 2011 is likely to be another year of the foreclosure.

On the positive side, mortgage rates fell precipitously throughout the period, with the thirty-year mortgage rate currently hovering near 5 percent, close to a record low. Similarly, affordability conditions improved sharply during the same period with the National Association’s Affordability Index close to record highs today due to falling mortgage rates and falling home prices. The housing sector is well positioned for an ascent if the nation’s job and income situation improves.

Looking ahead, 2011 promises to be a year filled with caution and hope. The economy is mired in a modest expansion and the financial markets remain overly cautious with restrictive credit conditions.  Payroll employment gains increased far less than expected in December, with a net gain of only 103,000 jobs; a major disappointment.  The economy created on average 94,000 jobs a month last year, well below what is needed to keep pace with population growth as well as absorbing unemployed households back into the workforce.

Companies are not yet comfortable with the potency of the recovery to commence hiring again. Despite a dreary employment performance over the remaining months of last year, payroll employment is likely to strengthen this year due in part by the tax agreement achieved between the Obama administration and Congress last month. It’s possible that employment gains could average about 250,000 per month during the second half of the year.

Federal Reserve Chairman Ben Bernanke’s recent testimony before the Senate Budget Committee offered little indication that the central bank is contemplating tighter monetary policy any time soon so interest rates are likely to remain low throughout the first half of this year. The Federal Reserve remains concerned about a sluggish labor market.  

Recent data indicate the recovery is gaining a stronger foothold; retail sales jumped 0.8% in November in total, on top of an upwardly revised 1.7% gain in October; auto sales ended the year with a seasonally adjusted annualized sales of 12.55 million units in December, the strongest pace since September 2008. Consumers are spending again but with some reservation. The Conference Board’s consumer confidence index declined 1.8 points in December, to 52.5, counter to expectations of a gain. The confidence index has been basically flat for the past 18 months.  Although some economic indicators are picking up, consumers remain uncomfortable about their economic situation.

The housing outlook for 2011 is very much dependent upon the performance of the economy, job market and the pipeline of foreclosures. Homebuilders remain cautious due to a sluggish labor market; housing starts have been lifeless for the past two years, hovering below a 600,000 unit pace since the beginning of 2009. Residential construction is expected to gain only modest traction in 2011 due to less-than robust job gains expected this year and to a disproportionate amount of distressed sales. Foreclosure moratoriums which created robo-signing problems were a short-term fix; when the robo issues are resolved and the moratoriums are lifted, supply will be in excess once again.

On the demand side, home sales-new and existing-are expected to post modest gains throughout the year. The key drivers of housing demand: jobs, income and confidence, are not expected to break out of last year’s funk anytime soon. And a homebuyer tax credit is not in the offing this year to provide a temporary boost in housing demand like it did in the first half of 2010.

2011 will likely be an improvement over last year, but a full recovery in housing is not in the cards. A less than stellar economy combined with an excessive amount of distressed sales and depressed home values will keep a full fledged recovery at bay.

A genuine housing recovery is possible in 2012.  Today’s solid fundamentals are creating favorable housing conditions for tomorrow: low mortgage rates, near record affordability, a lean inventory of new residential construction and cyclical lows in home values. Everything is riding on what I believe is likely by next year, a healthy economic expansion. Here’s hoping for a happy outcome.

Recent housing data have been dreadful; home sales have plummeted as potential buyers disappeared from the marketplace. The fate of the nation’s housing sector largely rests on prospects for the economy as well as the government’s response to current anemic conditions. 

Economy

The next two quarters will be unpleasant for the U.S. economy. The economic recovery has strayed off course; the job market remains weak and household and business confidence have eroded.  The bad news is the government is about out of tools for remedies; the Federal Reserve has done all it could over the past 12 months with interest rates near historic lows; while Congress and the Obama Administration contemplate yet another fiscal stimulus package (or business tax credits). 

Notwithstanding these current problems, the economy is poised to recover, albeit several quarters late. Business and household balance sheets have improved markedly, with debt burdens falling over the past several years.  Corporate profits are up as well as household savings rates. Job creation is expected to gain momentum during the next several quarters, boosting both business and consumer confidence. On balance, the economic recovery remains on shaky ground; everything must go right for the economy to experience a steady rebound. 

Housing

So far, the nation’s housing sector has experienced a brutal summer. Existing home sales plummeted 27.2 percent in July to 3.83 million annualized units compared to an annualized 5.26 million unit pace in June. The hangover effect of the housing tax credit was the primary cause for the sales debacle; a large number of buyers, who would have closed on homes in July, were incentivized to purchase homes earlier to take advantage of the tax credit, explaining July’s historic low sales pace.  Adjusting for the tax credit effect, existing home sales are running at an annualized 4.9 million unit pace (the average of the past three months). 

Similarly, new home sales for July fell 12.4 percent to an annualized 276,000 unit pace from a month earlier.  Weak demand for new homes and competition from distressed properties has weakened the homebuilding industry considerably; builders continue to avoid new residential construction. 

The months supply for both existing homes and new homes in July rose considerably to 12.5 and 9.1, respectively. Although these numbers indicate a serious excess supply problem, it is not as bad as it appears. Most of the rise in the months supply is due to the huge drop-off in the pace of home sales and not due to any meaningful increase in the number of properties available for sale. If we used the three month average of home sales to smooth out the tax credit effect, the months supply number would be much lower. 

Even with tax credit adjustments, its clear current housing demand is anemic; potential home buyers have literally disappeared from the marketplace. And who’s to blame them? The financial incentives (tax credit) to purchase property are gone; the economy is performing poorly, creating a paltry number of jobs per month; and everyone is expecting another round of distressed home sales, promising to exert downward pressure on home values. No one wants to purchase a home today, knowing its value will be lower tomorrow. 

It’s not all bad; there are signs that the post-tax credit blues is coming to a close.  Pending home sales rose by over 5 percent in July, while mortgage applications to purchase homes climbed 6.3 percent in July. Both housing measures suggest that the worst may be over but nothing more. There are no signs that a recovery is in the offing. 

Government Response

How the government responds to the current housing crisis is critical to the likelihood of recovery. Government efforts to mitigate the number of foreclosures projected to flood the market over the next twelve months must be effective. If government programs like the Home Affordable Mitigation Program, HAMP, fail, distressed property sales will be more pervasive, exerting substantial downward pressure on home values. Falling home values, in turn, inhibit an already anemic demand for home buying. Government efforts to revive the nation’s job market are equally as critical to a housing recovery.  

Outlook

At present, the housing sector is in a precarious position; risks are heavily weighted to the downside. Any meaningful rebound in housing demand rests largely on the wobbly shoulders of the economy. So far, economic recovery is tepid; job gains have been scrawny and consumer and business confidence continue to fall. Suffice it to say, the economy is providing only modest support for housing. 

The housing industry will likely remain frail for the remaining months of this year and well into next year.  A new wave of foreclosures is expected to hit the marketplace any time now.  There is a large  number of mortgage loans residing in the 60- and 90-day past due categories, and a meaningful percentage of them are headed for foreclosure. Further, a number of public and private loan modifications over the past year have failed, adding to the inventory of distressed properties. Weak housing demand combined with a flood of distressed properties are expected to exert substantial downward pressure on home values. 

To this end, home values, as measured by the Case-Shiller home price index, will likely resume its descent and fall by another 5 to 7 percent over the next two to three quarters, particularly if government foreclosure mitigation programs prove ineffective.  That’s the good news; the bad news is– if  the economy double dips into recession, home values could fall by another 10 to 15 percent (my guesstimate). 

Despite the negativity surrounding housing, the likely scenario remains a housing recovery sometime in 2011.  Expect home values to fall by almost 5 percent during the next six months, followed by stabilizing home values due to the end of the foreclosure wave. At that time, a gradual rebound in home sales is in the offing; fingers and toes crossed.

There is no denying that weakness pervades the nation’s housing sector. Existing home sales fell to 5.02 million annualized units in February and are now down 23 percent since last November. Similarly, new home sales fell to 308,000 annualized units in February and are now 23 percent below the 400,000 annualized pace posted last October.  Incredibly, new home sales are now at their slowest pace in 47 years. To complete the trifecta, housing starts fell 5.9 percent in February to 575,000 annualized units from a month earlier.

The magnitude of weakness in home sales is somewhat puzzling given that the extended homebuyer tax credit is in play. At this juncture, the tax credit has yet to boost first-time and move-up home buying. Perhaps as the April 30 expiration date approaches, more and more households will take advantage of the credit.

Although unusually harsh winter weather may be a factor for weak home sales, it is nevertheless, unnerving to experience such large drops in demand with the backdrop of record housing affordability and historic low mortgage rates.

Another negative trend for housing is the fact that existing home inventories are rising rather than falling. According to the National Association of Realtors, the inventory of existing homes available for sale rose 9.5 percent in February to 3.59 million homes, compared to only 3.28 million homes available for sale in January. To make matters worse, these numbers may be an underestimate of the real inventory situation since a meaningful number of foreclosure properties available for sale are not reported by Realtors so are not included in the NAR numbers.

On the positive side, job losses are now giving way to job gains. Non-farm payrolls rose by 162,000 in March compared to job losses of 14,000 registered in February. According to Moody’s Economy.com, underlying job growth appears to be running near 50,000 per month, adjusting for temporary census hiring and the effects of unusually bad winter weather. We have waited quite a while for a reversal of fortune in the job market and a positive job outlook is likely. Corporate profits have surged in recent months due to lower labor and borrowing costs. Combined with a substantial rise in equity values, businesses are regaining the confidence to hire again.

Looking forward, it is increasingly likely that the home sales numbers will improve in the not-too-distant future.  Future job gains and a slight loosening in mortgage credit are expected to spur housing demand. In addition, upward pressure on mortgage rates and the pending expiration of the homebuyer tax credit (April 30) are expected to give households some urgency to rush into the market to take advantage for one last time historic low mortgage rates and an $8,000 tax credit ($6,500 for trade-up buyers).

At long last, the housing sector may be gaining some momentum.