There are signs of a turnaround in the beleaguered residential-real-estate market, but industry watchers warn that the recovery will take a lot longer and look nothing like past housing market cycles.
Most analysts calculate that housing sales reached a bottom in January, followed by an April bottom for new-home construction.
But the low point for home prices, which is typically the last stage of a housing downturn, has been skewed by the effect of federal stimulus intervention, rising unemployment and an unprecedented volume of foreclosures and bank-owned properties.
“The good news is that even if home prices haven't hit bottom yet, we've gone through the worst of the decline. But it's also safe to say that housing prices won't be doing anything for a long time,” said Thomas Higgins, chief economist at Payden & Rygel.
The last significant housing market downturn occurred in the early 1990s.
Sales bottomed in the second half of 1990, followed within a few months by a bottom for new-home construction. Al-though that recession officially ended in early 1991, it took almost three more years — until the third quarter of 1993 — for housing prices to reach a low point after an average total decline of 8%.
It took another six years for home prices to recover to the point of the prior peak.
This time around, according to the Case Shiller 20-City Housing Index, home prices on average have fallen nearly 30% from their peak in 2006.
HIGH JOBLESS RATE
Such an extreme drop, combined with the highest national unemployment rate since 1983 at 10.2%, lays the foundation for a very slow housing market recovery.
“Everyone is hoping real estate has stopped going down, but there's no way in hell we're returning to where we were,” said Blair Anderson, managing director with HighTower Advisors LLC. “I strongly believe real estate will be cheap for several years, and any growth rate will be back to traditional norms of between 3% and 4% a year.”
The National Association of Realtors is citing eight consecutive months of increased pending home sales as a sign of a fledgling housing market recovery.
But the real estate industry trade association also acknowledges that any increases are coming off a very low base set by the market's downturn last year.
“We've gone from a buyer's market to one that is getting closer to price equilibrium. But we'll continue to see foreclosures come onto the market, and we need a lot of qualified buyers to soak up the inventory,” said Walter Molony, a spokesman for the association.
According to Mr. Molony, 2009 home sales are expected to surpass last year's by about 100,000 and are on track for an annual total of about 5 million. That is almost 1 million sales behind the historical norm.
A key driver behind the slight pickup this year is the federal government's $8,000 first-time-homebuyer credit, which was set to expire at the end of this month but has been extend through April.
The program was also expanded to include a broader category of “move-up” buyers.
Without the help of the tax credit, sales wouldn't be up 1.5% over last year, but instead would be down about 6%, Mr. Molony said,
The association estimates that 45% of home sales this year have involved first-time buyers taking advantage of the tax credit.
“Without the tax credit extension, there will be a lot of pressure on the housing market and the economy,” Mr. Molony said.
Another form of pressure on the housing market involves the winding down of $1.2 trillion in funds that the federal government committed to purchasing mortgages from Fannie Mae and Freddie Mac.
CHAIN REACTION
The program, which has made the government the largest purchaser of Fannie and Freddie mortgages, is scheduled to end during the first quarter of next year, likely sparking a chain reaction that will drive up mortgage interest rates.
“The banks set interest rates based on what Fannie and Freddie will pay for a mortgage, and Fannie and Freddie set their rates based on the market demand for mortgage-backed securities,” said Gibran Nicholas, chairman of the Certified Mortgage Planning Institute.
In essence, the government's pullback will dramatically reduce the market demand for mortgage-backed securities, which could lead to higher mortgage rates.
Though pent-up demand and affordability are already in place to spur a recovery, continued government support of the housing market is necessary, Mr. Molony said.
“This is not like Cash for Clunkers, where we're just borrowing from future demand,” he said. “This is the best year on record for housing affordability, and we estimate that there are 3 million renters who are qualified to buy their first home.”
Turning many of those renters into homeowners is a crucial part of the equation, according to Mr. Molony.
“The housing market always heals from the bottom up, and in much of the country right now, houses are selling for less than the replacement construction costs,” he said. “But we're also dealing with a fear factor element, and if someone is concerned about their job or out of work already, they're not in the market for a house.”
E-mail Jeff Benjamin at -jbenjamin@investmentnews.com.
