Moving Past the Election to Keep the Momentum in the Real Estate Recovery

With the election now behind us, the country and the economy now has a clearer idea of where they're headed for the next four years. Notably absent from most of the rhetoric from this fall's campaign was a sense of what the real estate industry could look forward to. The signs of improvement in the sector emerging at the beginning of the year have now been validated as a full recovery, but the significant drop in foreclosure starts, rising equity in American households with appreciating home values, and the return of a seller’s market were seldom mentioned. Now that the dust has settled, it’s time to turn our attention back to pressing issues put on the back burner that could make or break our housing recovery.

Some of the best news for housing in 2012 is the ongoing “undistressing” of the American homeowner. Higher employment numbers, the effects of a flurry of Obama Administration housing programs initiated in 2009, a landmark $26 billion settlement between lenders and states addressing past foreclosure improprieties, and a more aggressive mortgage workout strategy executed by banks has resulted in a 6 year low in foreclosures and more borrowers staying current on mortgage payments. Short sales emerged as one of the most popular solutions to foreclosure, and made arguably the most noticeable contribution to helping distressed homeowners. Lenders lose less on a short sale than a foreclosure, and more borrowers can take advantage of short sales now with an expansion of programs that include borrowers who are current on payments. What threatens to scuttle the gains short sales have achieved is a crucial tax benefit for borrowers currently on hold. The Mortgage Debt Relief Act, which addresses the difference between the original loan amount and the actual selling price of a property in a short sale transaction being treated as taxable income, is set to expire on December 31st. The Senate passed an extension of the bill, but no further movement has occurred to keep this important benefit to borrowers intact as the nation focused on selecting its next president. This is a huge concern for the continued recovery and short-sale acceptance by lenders. Recent indications are that the “REO rental” program has not been allowed to gain momentum because lenders are realizing that the short-sale is in fact a more profitable solution and they are holding off on selling at steep discounts to institutional private buyers with the rental restriction in place.

The Responsible Homeowners Refinancing Act (RHFA) is another example of pending legislation in Congress with great potential to solidify the recovery, but finds itself stuck in a holding pattern. Approximately 12 million homeowners could benefit from the bill that would extend refinancing opportunities to Fannie and Freddie-backed mortgagees current on payments but facing negative equity or other hardships. Introduced in September, the bill has languished in Committee with no further consideration. The RHFA could be the final component needed to power a sustained cycle to stabilize the current borrower base. Congressional movement on the future of the RHFA is crucial for us to move on in the development of the cycle.

The election- season freeze impacts arguably the most sought-after player in the current cycle --- the private investor. The future increase of capital gains taxes and the extension of Bush-era tax cuts is still undecided and could have a long term effect on investor participation on sustaining a fully-rounded recovery past 2012. Two investor camps have formed – one camp which was responsible for a short- term flurry of commercial real estate investment activity in the third quarter leveraging advantages of the current tax environment, and the other camp that assumed a more conservative “wait and see” approach and backed out of the market. The future of how taxation treats investor real estate profits is a major factor that keeps investors in the commercial real estate game through this cycle, or keeps them on the sidelines. Real estate needs private capital in the game to sustain the recovery from the commercial perspective. There is also the need for a post election relaxation of lending standards and compliance allowing the pendulum to swing back towards easier access to capital.

Given the growth in the nation’s GDP recently attributed to housing, and recent findings that real estate could continue to fuel the economy’s growth regardless of the election outcome, very little priority has been given to continuing the momentum. The industry’s progress could face new headwinds impacting homeowners and investors alike without fast action from the government now that November 6th has come and gone. It’s time to move forward.

Cautious Optimism for Market Recovery

The country has gone from one extreme — lax oversight in financing — to the other, making it nearly impossible for potential homeowners to qualify for loans and purchase property resulting in a large inventory of homes and unstable markets. It’s now up to the banks. The only way for the residential real estate market in the U.S. to recover is for the banks to return to more flexible lending processes. At the commercial level, however, deals are taking place as pent-up cash rushes to well-priced real estate.

At Peak, we are more optimistic in the real estate market’s recovery and see buyers ready to commit to developments in both residential and commercial property, creating both opportunities and new jobs. We lend our own capital and are committing to new townhouse developments and shopping centers nationwide.

Three trends to watch in 2012:
1. Banks will increasingly embrace both short sales and modifications to loan principals. Over the past few years as new bills were introduced to protect homeowners, it’s become harder for banks to foreclose on properties, though in California alone over 800,000 properties were lost to foreclosure in the past five years, according to property information service DataQuick.

In reality, legislation has only delayed the inevitable foreclosure, exposed banks to legal issues and provided no real motivation for lenders to make the system move again. Banks have several options available to them to maximize cash flow in 2012 including short sales, which allow a third party to buy the property and the bank to recoup more of its investment than with foreclosures and loan principal modifications which incentivize homeowners to not abandon property and keep paying mortgages while recalibrating the system to current fair market values. With California’s Bill SB 458 signed into law in July, we’ve seen an uptick in short sales as homeowners feel protected against any future lien holder payments on the property. In 2011, the number of federally-sponsored and proprietary loan modification programs increased substantially despite the wave of new foreclosures.

2. Demand will return and necessitate new construction. While the building industry has suffered along with every other sector of real estate and construction of new homes – a key indicator of economic health – recently posted its largest decline in 27 years. Smart investors see potential in the building and construction industry.

Analysts at Fannie Mae and other organizations predict that the available rental units many consumers are turning to – away from single family homes – will not meet the growing demand for affordable housing. Also, on the retail and office front, as businesses expand, there will be shortages in commercial square footage. With new capital from private equity and large banks, selecting the right location to build in good markets is key to achieving a fair return on investing in new construction.

3. Revolutionary ideas will help kick-start the industry. From sanctioning Freddie Mac and Fannie Mae to act as landlords, effectively managing and renting distressed properties, to razing large numbers of homes to reduce the sprawling inventory and stabilize home prices, there are a number of expert recommendations on how to save the real estate industry. Enticing home occupancy to improve a community’s overall property value may be the best option. Without it, properties will depreciate.

As the natural cycle of short sales, loan modifications, and foreclosures runs its course, coupled with new construction driven by demand and implementation of strategies to liquidate the governments’ inventory of distressed properties, we feel a market recovery benefitting homeowners as well as investors is within reach.