Six-year housing hangover tough to shake off

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By John W. Schoen
A woman jogs by new housing construction in Darnestown, Maryland in this file photo taken October 23, 2012.GARY CAMERON / Reuters

If this is a housing recovery, then it’s a ‘recovery’ in name only. The patient remains pretty ill, and it’s going to be a long road back to health after one of the worst housing busts on record.

Fresh data released this week paint a mixed picture. The government reported Wednesday that housing starts fell 8.5 percent in January, though starts on single family homes edged up higher. Building permits – a barometer of future construction – posted solid gains.

But the pace of construction remains less than half what it was during the late-2005 peak of the housing boom. And the recovery has come in fits and starts. On Tuesday, a closely-watched report from the homebuilding industry noted sluggish sales traffic last month after steady gains through 2012.

“The single-family market in the Northeast, hurt by high foreclosure rates and a slowdown in population growth, is struggling,” said Patrick Newport, a housing economist at IHS Global Insight. “The single-family segments in the other three regions are picking up -- but slowly, and levels remain depressed."

Despite multiple government policies to spur sales, including the Federal Reserve’s ongoing effort to hold mortgage rates near the floor, sales of both new and existing homes still badly lag “normal” levels.

“The market appears to be recovering, but you can't call this a normal market when you have the lowest interest rates in a hundred years and half of all borrowers are still putting basically zero down," said Ed Pinto, an American Enterprise Institute fellow and former executive of government-backed mortgage giant Fannie Mae. “That is not a normal market."

Neither was the 2007 housing bust. After peaking at 7.1 million in 2005, the annual pace of home sales crashed to 4.1 million in 2008. Last year, sales edged back up to about 4.7 million. Though most housing analysts and economists believe sales and princes have bottomed, the recovery pales in comparison to past housing rebounds.

One reason: no matter how low interest rates fall, after playing too loose with credit during boom, banks are now much choosier about who gets a loan.

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“The biggest concern on a really robust housing market rebound now is coming from mortgage market constraints," said David Goldberg, an analyst who follows the homebuilding industry at UBS. "It’s tough to get a mortgage if you have marginal credit right now."

In many markets around the country, sales of existing homes also are being held back by tight inventories. Since 2010, the availability of existing homes for sale has fallen by half. In December, for-sale listings amounted to about 4.4 months’ worth of sales -- down from 9.4 months in 2010.

Anything less than a six months’ supply is considered a “tight” market. Some of the tightest markets -- including Sacramento, San Jose and Oakland -- are down to less than a months' supply, according to John Burns Real Estate Consulting.

After years on the sidelines, some sellers may be holding out for a better price. But millions more are unable to sell because they owe more than their home is worth.

Some 10 million homeowners -- roughly a fifth of houses with a mortgage -- are still underwater despite the recent uptick in prices, according to Lender Processing Services. Though rising home prices have reduced that number since the depths of the bust, the lingering “negative equity” of the mortgage metldown is keeping houses off the market. Few of those potential sellers feel like dipping into savings to write the bank a check for the shortfall.

Home builders have fared a bit better, as new home sales rebounded by 20 percent last year compared to a 9 percent bounce for existing homes.

But that bigger new-home bounce comes largely because home builders fell into an even bigger hole. Annual sales fell from a peak of 1.2 million in 2005 to just 306,000 in 2011, according to Census data. So the 20 percent rebound is a lot weaker than it looks.

Many headwinds
The home building industry faces its own set of headwinds. For starters, many of the industry’s smallest builders were wiped out by the housing bust. Those that survived are finding spot shortages of labor and supplies where demand is coming back, according to Lisa Marquis Jackson, a Dallas-based housing analyst at John Burns Real Estate Consulting.

Some building material manufacturers and distributors are skittish about adding more capacity until they see convincing evidence that the housing recovery is on firmly on track, she said. In some cases, they’re having trouble getting financing to expand.

“It takes a lot of money to get payroll back up and to get new people on board,” said Jackson. “The lending environment still isn't completely comfortable coming in to support materials suppliers and distributors.”

Other builders are having a hard time finding enough skilled workers to get the job done. Though housing starts have rebounded strongly -- up 37 percent from a year ago -- construction employment is up by just 1.5 percent in the same period.

Builders may be having a harder assembling skilled work crews because wages were cut sharply following the housing bust. Others are finding that the workers simply aren't there anymore.

“A lot of these workers found other jobs,” said Jackson. “They still have some scars from what they went through in the downturn. It’s going to take a lot to lure them back.”

It’s also turning out to be harder to lure back first-time home buyers, typically one of the strongest sources of demand in a recovery. After the historic, late-2000s price slide, many younger buyers are skeptical of the longstanding conventional wisdom that housing is a surefire long-term investment.

That’s meant that investors, lured by bargain prices, have become a much larger share of buyers than in past recoveries. But it remains to be seen how durable that “hot money” demand will be, said Pinto, the former Fannie Mae executive.

“In two or three years, they could all turn on a dime and decide this isn't the asset class they thought it was, and then they sell,” he said. “If that happens right at the time that interest rates happen to go up, then I think we're into a really tough situation.”