Housing Turnaround, Just Slightly…

JUN 15, 2012 12:47pm ET

Housing markets are showing credible signs of a revival that still is “in the early innings,” according to the State of the Nation’s Housing 2012 report released by the Joint Center for Housing Studies of Harvard University.

“Unless the broader economy goes into a tailspin,” argues the center’s managing director Eric Belsky, “stronger sales should further stabilize prices and pave the way for a pickup in single-family housing construction over the course of 2012.”

As expected, a mix of positives and negatives is affecting the current housing recovery.

Belsky’s optimism is based on several indicators including higher home sales and signs indicating home prices have finally hit bottom.

Another indicator of more stabile housing markets is a strong rental market, he said. Since 2005 the number of renters increased by over 4.4 million causing a significant decrease in rental vacancy rates while multifamily construction “is up solidly.”

It also means new home inventories are at record lows thanks to sharp drops in construction, the nation’s homeownership rate continues to slide down as rents climb up.

It is a give-and-take situation where housing market improvements simultaneously benefit the economy along with many existing homeowners, and increase burdens on other segments of the population, which in turn slows down the overall recovery.

The report reiterates “a number of challenges” are bound to continue their downward pressure on the pace of the homeowner market recovery.

The backlog of roughly two million homes in the foreclosure process is one of these challenges. Especially in the areas hardest hit by foreclosures, the so-called shadow inventory will keep dampening new construction and “could keep price increases in check.”

Furthermore, roughly 11 million underwater homeowners who owe more on their mortgages than their homes are worth also are stuck because they can neither sell unless willing to incur a loss, nor get a home equity line of credit to fund remodeling or other projects.

Another ever-present factor is employment and overall economic growth.

Chris Herbert, director of research at the Joint Center for Housing Studies, reiterated an old refrain that remains true. Only “a sustained increase in jobs” can spur demand and bring household growth back to its long-term pace, he said.

Lack of job growth matters to households old and new since it has affected the country’s new household formations, which “fall well below expected long-run rates due to a falloff in young adults being able to move out on their own and a slowdown in net immigration.”

In 2011, fewer than 700,000 households were added and that’s well below the 1.2 million or more annual average under “more normal economic conditions.”

Survey findings continue to suggest “that the overwhelming majority of young adults” see themselves as homeowners sometime in the future, Belsky says. Currently most plan to wait and nobody can predict how long that wait might be.

In the meantime, housing and cost of living pressures are at record highs.

These insiders warn that the combined effect of homeowners’ inability to refinance, rising rents and high unemployment has increased the number of households spending more than half their income on housing. Between 2007 and 2010—the most recent data available—the number of U.S. households paying more than half of their income for housing jumped by 2.3 million, bringing the total to a record 20.2 million.

“Even as the recovery takes hold in many markets,” Herbert argues, the affordable housing challenge remains strong both in the short and the long term, especially in foreclosure-ridden neighborhoods that will take years to recover.

“With rents up, home prices sharply down and mortgage interest rates at record lows, monthly mortgage costs relative to monthly rents haven’t been this favorable since the early 1970s,” Belsky says.

But that is not relevant to many current and aspiring homeowners who are readjusting their future goals.

Data appear to confirm what mortgage industry insiders were suggesting as the foreclosure crisis came into full bloom a few years ago: Mortgage products cannot make up for lack of affordability.

Many mortgage veterans have stressed time and again that not everyone can own a home. While the idea sounds very politically incorrect, that inability to purchase a home is more real than ever. One effect of the housing crisis is likely to be an adjustment in priorities that could lead to housing driven by lifestyle preferences rather than ownership.

Much like in wealthy countries throughout Europe, the renting versus owning ratio could change in the U.S. as well.

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