Housing Recovery Debate Lingers Heading into 2013

Business executives all have different opinions about the future of the housing industry. Image: Thinkstock

The housing industry has experienced a rollercoaster ride in 2012 as foreclosures and residential delinquencies are falling, but inventory is still not being released by the banks into the market. So the big question still looms among industry insiders—are we really in a housing recovery right now?

Rick Sharga, executive vice president at Carrington Mortgage Holdings, said the state of the industry is making progress, but he still anticipates a “slow, gradual grind-it-out recovery” heading into 2013. Sharga believes it will still take three to four years for a full recovery despite positive signs right now including an increase in pending home sales and inventory of homes for sale is falling due to homebuilders not building enough new homes to replace obsolete ones.  

“It looks like more of the same,” Sharga said at the recent National Property Preservation Conference in Chicago speaking about the future of the industry. “It’s probably a safe bet that the CFPB (Consumer Financial Protection Bureau) won’t regulate as much as the industry were concerned that they will. We’re probably going to see more aggressive protection toward consumers and borrowers.”

Lender Processing Services said approximately 4 million loans have been reported to be delinquent or in REO through October. Meanwhile, JPMorgan Chase is estimating 1.2 million new delinquencies for 2013, which would actually be a reduction from previous years.

Another industry executive who agrees with Sharga that the recovery is still far from over is Roger Beane, CEO and founder of LRES. Beane said servicers, hedge funds, state agencies and credit unions that LRES works with have forecasted for a 5% to 7% reduction in inventory between what the company has today and what’s going to be assigned in 2013.

“It’s going to be very interesting how the different programs available to consumers and investors on the loans get these properties through the mortgage process,” Beane said. “It’s definitely not a one-year recovery deal, but more of a three- to four-year deal before this 4.2 million and 1.2 million, as well as all of the modifications and such, will redefault at some point. Let’s hope that the three- to four-year figure brings some relief to the housing recovery.”

There are certain markets where LRES is having success selling its REO inventory, specifically California, which is “flying off the shelf,” Beane noted. “It doesn’t matter where, what, or how the property is, it’s being acquired,” he continued. “There are a lot of cash buyers and inventory is low, therefore resulting in more purchases.”

Other metropolitans where most or all inventory is selling for LRES at a much faster pace and price than last year include Phoenix, Los Angeles, San Francisco, Dallas and Baltimore. Meanwhile, rural areas remain a more-lengthy marketing timeline, Beane added.

“Many offers are coming over list prices especially with cash buyers. We find offers requiring a new loan struggle at times due to the buyer’s appraisal not achieving the value needed,” Beane said to Mortgage Servicing News. “In other words, the closed competing properties are not available to justify the buyer’s appraised value.”

But one of the biggest concerns among many industry insiders is how and when the shadow inventory—properties pending foreclosure or in a state of financial distress—will be released by servicers.

Capital Economics estimates that the backlog of homes that are at imminent risk of coming onto the market may be as large as 3.8 million, or one-and-a-half times the number of properties actually listed for sale. But the research firm said it does not expect housing supply to be greater than demand due to the $25 billion mortgage settlement agreement, and therefore the current recovery effort being made so far is sustainable.

“The foreclosure settlement has not led to a wave of foreclosure hitting the market. With foreclosure timelines still protracted, and banks wary of the effects that a glut of supply would have on the recovery, we anticipate a continued trickle of homes from the shadow inventory, rather than a flood,” said property economist Paul Diggle in the firm’s report titled “Is the Housing Recovery the Real Deal?”

Kevin Will, a member of US REO Partners and founder of Massapequa, N.Y.-based REO Sales Corp., still thinks the industry is in a bit of a transition. Will said he is hearing that inventory will begin to increase in 2013, but he is hesitant to believe this news.

One of the main problems why Will is struggling to receive inventory is because New York’s default foreclosure process is the longest throughout the country, sometimes taking as long as 18 months. Nationally, inventories are down anywhere from 20% to 25%, said Trulia chief economist Jed Kolko.

“We’re hearing from our clients that more bank-owned properties will be available, but the same thing was said the prior year,” Will told this publication in an interview. “Buyers’ interest in acquiring REO properties remains pretty stable and is active right now. So, hopefully inventory will increase. But we have to wait for the spring when the market starts to pick up a little bit.”

A main area of the housing market that investors are currently targeting is the REO-to-rental asset class, which many business executives think will be successful in 2013 as demand outpaces supply. A recent report by CoreLogic found more than half of all rental housing in the U.S. consists of single-family homes.

Tony Rossi, president of Chicago-based RMK Management Corp. and M&R Development, said renting will be a popular choice for investors until employment numbers show significant improvement. “People are still recovering from the recession and many won’t feel secure buying until they have more confidence in the job market,” he said in a written statement. “For them, the flexibility of renting still outweighs any financial benefits of buying.”

Tinley Park, Ill.-based MACK Cos. also is predicting that the single-family rental market will be a favorite among investors in 2013. “As mortgage rates remain low and rental rates continue to climb, the market will continue to reward investors with outstanding returns in single-family rental homes,” said Jim McClelland, president of MACK Cos.

Right now, the housing recovery is being driven by cash-buyers and investors in most markets and Capital Economics forecasts little signs that “investor appetite is abating.” However, investors will eventually not be able to afford the high prices that they are creating in the marketplace, which could create a problem for the industry if lenders still have strict underwriting guidelines.

“All in all, if the economy continues growing, it’s reasonable to expect lenders to loosen the reigns somewhat,” Diggle said. “The upshot is that mortgage-dependent buyers will gradually play an increasing role in the housing market recovery.”