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A Slow-Motion Real Estate Recovery

Looking for signs of an economic and housing recovery might be like watching grass grow.

Jed Smith, managing director of quantitative research for the National Association of Realtors, characterized the economic upturn as “a mediocre recovery,” and a “very slow recovery … largely because of job issues. We’re looking at up to a four-year recovery.”

Smith and other economists, who participated in a “Mid-year Economic Update” panel during an annual National Association of Real Estate Editors meeting last week, were in consensus that unemployment and the foreclosure inventory overhang loom as big barriers as the economy climbs out from its deep burrow.

“The good news is that we’re in a recovery … but we’ve got a ways to go,” Smith said.

The loss of about $14 trillion in wealth during the nation’s financial avalanche equates to the loss of about one year’s worth of income for all U.S. workers, Smith said.

He blamed a lack of job creation, “unreasonably stringent lending standards,” and depleted consumer confidence as contributors to the stagnant economy.

Distressed home sales are going to continue to account for about 35 percent of all home sales for the next two to three years as the nation works through its bloated foreclosure inventory.

Foreclosures and short sales “are not going to get a lot worse, not going to get a lot better,” in the short term.

Some other unknowns that could impact the pace of recovery: congressional reforms that could lead to substantially higher mortgage down payment requirements, and that could impact the form and function of secondary mortgage market giants Fannie Mae and Freddie Mac.

Also, Smith noted that uncertainty in the European credit markets is another wild card for the U.S. recovery.

He suggested that an easing of federal policies relating to tourist visas could be beneficial to the economy, while upgrading the skills of U.S. workers is a longer-term fix.

While home prices are generally down, “the actual market has been stable over the last three or four years,” he said, with annual sales ranging around 5 million for the past few years.

He expects sales to remain fairly constant for the next three to four years.

A promising sign for housing: “We’ve got 10 million more households in this country (now) than we did about 10 years ago,” which provides for some pent-up demand when the market accelerates.

There are changes in demographics that will impact the market, he also said, and “the two-child, one-dog, two-parent family is now about 10 percent of the American public.”

Mark Dotzour, chief economist for the Texas A&M Real Estate Center, said government stimuli have delayed recovery.

“We’re not in a ‘double dip’ in my mind,” said Dotzour — referring to some economists’ talk of a second dive into downturn after some signs of an economic rebound — “we just never hit bottom in the first place.”

The market essentially “fell off a cliff,” and the government’s “lifeline” of programs it throttled at the recession, among them the homebuyer tax credit programs, “Cash for Clunkers” auto program, loan mod programs and Federal Reserve’s purchase of Treasury debt, did not have the intended benefits.

The market “would have started coming back up to a year ago or so if we hadn’t had the federal intervention in the first place.”

“We like capitalism on the way up and socialism on the way down,” he said.

And who ultimately pays for such programs? “Not the Tooth Fairy, not Uncle Sam,” he said.

Dotzour criticized some reporting by the industry and media of price metrics that can be misleading. He noted that nonforeclosure properties may have a fairly constant price, though in reporting the average price of homes overall — including foreclosure properties — the price data can overlook the differentiation between distressed and nondistressed homes.

Like Smith, Dotzour said that there are a few key ingredients required for a recovery: “We need jobs; we need cheap mortgage money; and we need positive price appreciation.”

The “shadow inventory” of homes that have been foreclosed upon but haven’t yet been listed for sale has contributed to consumers’ uncertainty, he said, as prospective buyers “don’t know whether one (foreclosed) house in their market or 1,000 homes” may be hitting the market.

“Everybody knows there’s a huge overhang of shadow inventory that’s going to come into the market,” he said.

But there are markets that are faring better than others, and Dotzour noted, “Not every city in this country is … Phoenix or Las Vegas.”

Demand in the rental market should continue to grow because of a variety of factors, such as the foreclosure fallout that forced former homeowners to return to renting, said Stan Humphries, chief economist for online real estate valuation and search company Zillow.

“The stage is being set for very strong increases on the rent side … demand is probably going to outpace supply,” he said.

Between 1.2 million and 2.2 million homeowners are transitioning from owners to renters, and rental prices in almost all metros are expected to rise about 3.5 percent to 4 percent this year, he said.

The homeownership rate may overcorrect on the down side, sinking below the traditional standard of 64 to 65 percent, he said, but he expects that once home prices stabilize — and consumers realize home prices have stabilized — there will be a resurgence in homeownership rates.

Like Dotzour, Humphries said he does not believe that there is a “double dip” in house-price levels for nondistressed homes.

“We believe … that we’ve had a gentler, but more consistent decline from peak” in home prices, falling about 30 percent from peak levels during this downturn, he said. “We show consistent decline, no double dips.”

He added, “The good news is we’re moving in the right direction. The bad news is we don’t believe there’s going to be in the offing in the next few months.”

The federal homebuyer tax credit programs appear to have been largely ineffective, essentially “stealing” sales forward that would have occurred at a later time. “We believe pretty strongly that we paid back every bit of that stimulus,” he said, with the slumping sales that followed expiration of the tax credits.

The market’s sustained declines should end in 2012-13, and the transition of foreclosures into the marketplace and the state of employment will have a bearing on that time line, Humphries said. The pending reduction in the conforming loan limit later this year should have only a modest impact on the market, he said.

“We’re not going to hit bottom until (foreclosure resales) have peaked,” he said, which should occur this year.

Another metric that will bode well for recovery: The household formation rate must move up again to normal levels. “We need to see it get back up to levels we were seeing four months ago,” he said.

In some parts of the country, such as in some commuter communities far removed from job centers, demand may never return to the levels seen during the boom years, Humphries said.

“We are seeing signs that people want to live closer-in — they want to live in smaller homes,” he said.

And just as consumers are being forced to live within their means, so must the government, said panelists.

“We’ve got to stop expanding our debt. Everybody’s figured that out except for Congress,” Dotzour said.

Shaun M. White, vice president of corporate communications for Re/Max International, who spoke during a separate panel addressing the foreclosure crisis, said the nation has already seen about 3.5 million to 4 million foreclosure sales — which he expects is roughly a halfway point.

White said he believes it’s critical to quickly “get through the large number of (foreclosure) properties that are out there and move on.”

There is a place in this market for “the responsible investor,” he said, as investors can play a valuable role in the recovery.

The average time it is taking to foreclose on delinquent owners climbed to 400 days in the first quarter, and 619 days in Florida, according to RealtyTrac data, White noted — the numbers have been impacted by the so-called robo-signing scandal and other problems with foreclosure processes that have slowed foreclosure time lines.

“We are at a 40-month low in the number of properties in the foreclosure process (but) don’t let that fool you — banks are going to get this going and I think you’ll start to see those numbers increasing again,” he said.

The federal government’s loan modification programs have so far not put much of a dent in the problem of delinquent borrowers, he said.

But Robert Doggett, author of the blog who is with Texas Rio Grande Legal Aid Inc., a nonprofit organization that provides free legal services to low-income residents in Southwest Texas, said that he believes a call for expedited foreclosures and short sales is a wrong-minded approach.

There are some parties who stand to gain from foreclosure sales vs. loan modifications, he said, and some homeowners find that the programs that are supposed to help consumers avoid foreclosure are failing them.

“There’s no place for these folks to go,” he said. “They don’t want to be there. They want options. They don’t have them. My interest is trying to prevent foreclosures from happening.”

He said, “There are incentives for these (loan) servicers to foreclose, and there’s not for servicing, modifying the loans.” HAMP, the Making Home Affordable Program, “is a joke,” he said, and the system is extremely tough for consumers to navigate.

White said that Realtors do work to help consumers avoid foreclosure. “When Realtors talk to lenders they tell them what they think of the way they’re handling the foreclosure problem. We counsel our Realtors, ‘If (you) can help a homeowner without making a commission at all — do it. It will help you in the long run,” he said.

“Lots of our agents work for free to help people with short sales, a deed in lieu, whatever it may be. We’re trying to be proactive and reach out and contact that homeowner,” he said.

Also, White said that Re/Max has encouraged banks to “streamline their short-sale process. We think that we’ve made tremendous strides there. We’re not where we would like to be but the problem is better than it was.”

Short sales, he said, are “a great alternative to foreclosure and we need to get bankers and lenders to acknowledge that so it can happen and so it can happen in a reasonable amount of time.”