Monday, June 17, 2013

What Could Be Looming in the Rear View Mirror as Housing Recovers

What a difference two years makes. While the media and other pundits proclaimed loudly and often the end of our industry as we know back in 2011, the smart money should have been on the analysts and economists that recognized real estate was in the throes of a downward cycle that would eventually correct itself.  Granted, this was no ordinary cycle and there is still blood on the streets. A recession initiated by an over-inflated real estate market imploding almost proved the media and pundits right. But a full court press comprised of a combination of monetary policy actions, government programs, and the “X” factor of cash rich private investor participation gave housing the foundation it needed to rebound.  Today we enjoy a much more stable market. To sustain the industry’s current prosperity, we should take note that the issues that haunted us during the darkest moments of the housing crisis, while mitigated, are still factors that require action. 

One example is the recent extension of the Obama administration’s Home Affordable Mortgage Program (HAMP). Originally set to expire at the end of 2013, the program was extended for two years through 2015. To date, over a million homeowners have received permanent modifications under HAMP since the program’s inception in 2007, with over 42,000 modifications granted this year. While at first glance, the program appears to have justified extension by helping huge numbers of homeowners afford their mortgage, approximately 1/3rd of loan modifications executed under the program have re-defaulted according to a recent government report. This implies that significant cross-numbers of distressed homeowners are still on the threshold of foreclosure. 

In addition to a less-than-perfect long term track record on loan modifications, ongoing lender foreclosures that comprised the dreaded “shadow inventory” should not be taken for granted in light of our current recovery either. Granted, an improving economy combined with proprietary and successful government loan modifications has put a virtual ceiling on mortgage delinquencies and Notices of Default filings; 2013 has seen the largest drop in foreclosures and 30 and 60 day late mortgage payments in six years. However, while small and getting smaller in comparison to past years, there remains a steady stream of homeowners going into default. In reaction to heightened regulatory scrutiny to ensure that proper protocols are being followed in dealing with distressed homeowners, major banks have put their thumb on the foreclosure “pause” button to ensure procedures are being followed to avoid running afoul of any potential processing errors. At some point once these institutions are confident they are meeting regulatory guidelines, foreclosure filings will resume. 

As the current recovery cycle continues thanks to heavy investor participation, a potential exit of this group could be on the horizon as real estate values continue to rise.  Clearly, smaller independent and larger institutional investors stopped housing’s downward spiral by buying up billions distressed and undervalued assets. The good news --- investor activity sustained housing while government modification and refinancing programs, lender settlements with regulatory agencies, and an improving economy kicked in to help cure the crisis. The not-so-good news:  bulk investor purchases have also contributed to shortages, which in turn are driving prices up to a point where investors won’t enjoy the strong returns they once did and could start looking elsewhere for higher yields. The steady injection of private capital has been a key ingredient to the success of our current cycle. We’re nearing a critical inflection point where the mass acquisition of property by investors that proved such a boon to the industry is now creating so much appreciation that those same investors could leave. At the end of the day there needs to be real homeowners that acquire a property with the intention of staying. I have clearly seen large samples of homes being sold by investors to a new group of investors. As the price is increased, the affordability factor has declined to the ultimate user.

In some circles, there’s an impending air of euphoria concerning the upward trajectory of this new phase of the real estate cycle with appreciating values in both residential and commercial sectors, increased purchase activity, increased construction to meet demand, and an overall new respect for the contribution housing has made to the economy. Let’s not forget a similar time ten years ago where a different type of euphoria permeated the industry leading to the now infamous “bubble and bust” phase that played a role in one of the most devastating recessions of our age.  We as an industry have learned some hard lessons. And as a result, this current period of growth has great potential to be more sustainable and fundamentally sound.  But it’s important to keep one eye on the mirror and an ear to the pavement. The issues that led to the housing collapse have not been eliminated, only contained. There are still prescriptive solutions that must be applied to truly put the housing crisis behind us for good.

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