Modest Recovery in Two Years?

Many housing markets could see a stronger recovery two years from now, even though the latest forecast for the coming year shows only modest ones, according to one forecast.

Although there aren’t any overwhelmingly strong appreciating forecasts in the near term, the depreciating ones are milder than they were a year ago, states Veros Real Estate Solutions, a collateral valuation provider based in Santa Ana, Calif.

In its quarterly forecast update for June 2010 through June 2011, Veros said California’s Inland Empire area, including Riverside, San Bernardino and Ontario, is seeing modest appreciation, joining the state’s strongest metro region, San Diego.

“Colorado is beginning to look good again to buyers, with three cities among the top 10,” said Eric Fox, vice president of statistical and economic modeling at Veros. “A new entry among the top five positive trending areas is Louisiana’s Shreveport and Bossier City area.”

Chico, Calif., leads the list of weakening markets, but Florida continues its depreciation trend in many areas along its East Coast. Nevada’s second largest market, Reno/Sparks, stays on the list of weakest markets, while Las Vegas avoided inclusion.

Utah did not, however, as the Salt Lake City and nearby Provo/Orem areas occupy the last two slots in Veros’ bottom 10.

Fox said while the Houston metro area is also demonstrating modest improvement, at this point the company can only speculate on the effects, if any, that will result in the residential real estate market from the catastrophic oil spill in the Gulf.

The company said none of its ZIP code level models for the impacted coastal areas have yet shown significant forecast differences from those that are further inland and less impacted.

Real estate values in the Central Plains are expected to hold steady in the coming year. Texas, Oklahoma, Kansas, Nebraska and parts of Louisiana and Arkansas are holding steady, underscoring a weak but consistent mild recovery.

Signs of stabilization in the delinquent and foreclosed markets must not be taken at face value since improvements “remain largely neutralized” by the more than 7 million loans in distress.

Deterioration vs. improvement ratios remain high with two loans rolling to a “worse” status for every one loan that fares “better,” according to a report by Lender Processing Services Inc., Jacksonville, Fla.

These improvements, deemed “artificial” because they resulted from government intervention efforts like the Home Affordable Modification Program, are more an indicator of political success rather than economic.

Between March and April of this year, the number of loans 90 or more days delinquent—including presale foreclosure—declined by 112,184 to 4,074,443.

The total number of noncurrent U.S. loans, which combines foreclosures and delinquencies as a percent of active loans in that state, plus REO, reached just over 7.3 million when extrapolated to represent total mortgage market.

The overall volume of loans moving from delinquent to current status declined to a three-month low supported primarily due to HAMP modifications.

A much more revealing sign of market stabilization, however, may be the fact that newly delinquent loans that were current at year-end and 60 or more days delinquent as of April declined from the 2009 levels “but still remain extremely high from a historical perspective, particularly within prime product.”

The LPS Mortgage Monitor Report shows another positive development as only eight states still exceed the foreclosure inventory national average.The report shows the total U.S. loan delinquency rate is at 8.99%, the foreclosure inventory rate at 3.18% and the total U.S. noncurrent loan rate at 12.17%.

States with the most noncurrent loans were Florida, Nevada, Mississippi, Arizona, Georgia, California, Illinois, New Jersey, Michigan and Rhode Island. States with the fewest noncurrent were North Dakota, South Dakota, Wyoming, Alaska, Montana, Nebraska, Vermont, Colorado, Iowa and Minnesota.

The tsunami of default risk is still receding based on data for in the spring of 2010, according to the latest UFA Mortgage Report by University Financial Associates of Ann Arbor, Mich.

The UFA Default Risk Index for the second quarter of 2010 has dropped to 182, half the peak level of 362 set in 2007. Under current economic conditions, investors and lenders should expect defaults on loans currently being originated to be 82% higher than the average of loans originated in the 1990s, but much less than the worst vintages of this cycle (2006-2008).

If, as some observers expect, inflation spikes due to excessive monetary ease, nominal house prices will be higher and defaults will be lower, said Dennis Capozza, a founding principal of UFA. “Although default risks remain elevated, the index is steadily returning to prebubble levels,” said Capozza.

“The worst vintages of this mortgage cycle are behind us. However, a return of the default risk index to prebubble levels is still several years away.”