Housing market improves, but foreclosures spoil the party.

by The Real Estate Faction on December 20, 2011

It looks like the housing market isn’t going to get any worse.

Five years into the worst housing depression since the 1930s, the latest monthly data from the Census Bureau indicate that the homebuilding industry is slowly coming back to life. Housing starts jumped jumped 9.3 percent in November to an annual rate of 685,000, the highest reading in 19 months. Starts were up in the Northeast, South and West but were down in the Midwest. New housing permits, which offer a fairly reliable forecast of future building activity, jumped 5.7 percent to the highest level in 20 months.

Much of the construction activity and new permit volume was for multifamily housing, as the heavy pace of foreclosures sends displaced households looking for homes to rent. Rental vacancy rates have been falling and rental prices rising, spurring investors to break ground on more multifamily units.

“The single-family market is finally getting off the mat,” said Patrick Newport, a housing economist at IHS Global Insight. “The multifamily segment is continuing to make small strides, and we should expect good housing starts numbers in the upcoming months.”
The November data follow a series of reports showing gradual but steady improvement in new home construction. Record low mortgage rates have made those homes more affordable. And a slow improvement in the job market has created more paychecks to cover those mortgage payments.

Home builders – those that survived the housing bust – have reported in surveys that they’re getting more optimistic about the market. A survey released Monday found that builder sentiment edged up in December for the third month in a row to the highest level in a year and a half.

“The (housing starts) increase, coupled with the improvement in home builder sentiment over the past few months, suggests the housing market may finally be breaking out of the ‘bounce along the bottom’ environment that housing has been stuck in since early 2009,” said Nomura Ellen Zentner.

But that bottom was so deep the housing industry has years of rebuilding ahead of it.

After peaking at 2.3 million in January 2006, the annual pace of housing starts crashed to less than 500,000 in April 2009. By way of comparison, housing starts had averaged roughly 1.6 million a year during the five decades before the housing bubble burst in 2007. Even if the current recovery holds, housing starts won’t cross the 1 million mark before 2015, according to housing economist Paul Diggle at Capital Economics.

There are multiple, strong headwinds that will hold back that recovery. The biggest is the long pipeline of housing foreclosures glutting the market with houses owned by banks looking to unload them at bargain prices. The steady pace of new foreclosures feeds that pipeline. And historically high rates of mortgage defaults and delinquencies, precursors to future foreclosures, have created a “shadow inventory” of homes that have yet to hit the market.

“There are more than four million vacant or soon to be foreclosed homes that will come onto the market over the next few years,” said Diggle. “Although foreclosures are not perfect substitutes for new builds, home builders will continue to struggle to compete on price with forced foreclosed sales.”

Those foreclosures continue to push home prices lower.

After leveling off this summer, prices began falling again this fall – down 7.5 percent, on average, in the third quarter. Even if those prices begin to stabilize again soon, it will be many years before buyers begin to see the kind of price appreciation usually associated with a healthy housing market.

Though low mortgage rates and better job prospects have helped, several forces continue to depress demand for housing. Falling prices have left some buyers waiting for convincing signs of a price floor.

Falling prices have also sidelined an estimated 15 million homeowners who now owe more on their mortgage than their home is worth. Unless they can get their lender to agree to forgive the difference, they’re unable to move up or move out without turning over a large chunk of savings to the bank.

The housing bust and weak economy have also put a big dent in the pace of new household formations, which slowed to a crawl in 2008, according to Census data. High levels of unemployment have forced some families to double up; younger potential home buyers have postponed forming new households.

After peaking above 7 million in 2005, the annual rate of existing home sales remains stuck below 5 million, according to the National Association of Realtors. It remains to be seen just how far below that level the pace has fallen. Some 10 months after housing industry analysts challenged the trade groups numbers, the NAR conceded that its data was flawed and had overstated the pace of sales since 2007.

By John W. Schoen, Senior Producer MSNBC.com


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