The U.S. economy is poised for moderate growth in 2012, but unlike prior recessions, the housing sector won’t lead the recovery, according to Mark Fleming, chief economist of data and analytics firm CoreLogic.
“We’re experiencing a high degree of abstinence in the market, but I think this is the year we’re finally going to see something happen in the market,” Fleming said during a presentation that kicked off SourceMedia’s Mortgage Servicing Conference held April 17 to 19 in Dallas.
In 2011, moderate growth was tempered by the natural disasters in Japan, the foreign debt crisis and the U.S. federal budget debacle. “As long as those things don’t happen again this year, we should see some improvement in the economy this year,” Fleming said.
According to Fleming, the serious delinquency rate of mortgage borrowers is declining from a peak of more than 0.8% in October 2009 to approximately 0.7% and overall mortgage distress is tempering.
The worst of the mortgage performance issues has passed and over time, Fleming expects to see an ever-growing decline in the inbound flow of delinquencies.
“If you’re a subprime loan originated in 2005 that’s still out there, you’ll probably keep paying,” Fleming said.
Still, real estate owned and short sales account for 27% of all home sales. While short sales produce a higher return for investors over REO sales, they’re still not the dominant form of distressed asset sale.
In addition, foreclosure backlogs are still significant in judicial states, where the process is taking longer to complete. With the exception of Florida, Fleming said that foreclosure pipelines are diminishing in the sand states where rates have been the highest during the downturn. Now, foreclosure pipelines are highest in the Southeast and Northeast portions of the U.S.
Fleming said there’s currently an eight-month supply of homes for sale on the market, but the rental market is about a six-month supply. Rental rates are increasing, which makes REO rental programs more appealing.
A CoreLogic study of housing prices and rent rates in 26 major markets shows that after accounting for the costs of purchasing and REO asset and putting it on the rental market, investors can expect an 8% return on average. In some markets, the return is as high as 12%.
“The return is there, which is why all these investors are lining up,” Fleming said.
Rent rates will continue to improve because the demand for homes is weak. Potential homebuyers are uncertain about their future job prospects and are reluctant to buy. In addition, the majority of homebuyers are existing owners, many of whom are bogged down by negative equity. Fleming said that 25% of borrowers are underwater and half of those homeowners have 50% or more negative equity. But while those existing homeowners are locked out of purchasing new homes, they’re also locked out of selling. Fleming expects to see home prices respond to that balance in the market, but will only result in “muted growth.”
“It used to be that the housing market would help the economy get out of a recession, this time it’s the other way around,” he said. “The economy will help housing.”
The nation’s historic, long-term gross domestic product growth rate is 3.25%, but Fleming expects only a 2% to 2.5% annualized growth this year. That means it will be some time before the jobs lost during the recent recession will come back.
Fleming said it’s an uphill struggle and explained by comparison that during the Great Depression, the economy lost 75,000 to 100,000 jobs per month. During the Great Recession, the economy was losing 750,000 jobs per month. So while monthly jobs reports show additions of 100,000 or more jobs per month, the unemployment rate will remain elevated for some time.
Further complicating matters is that many of the specific jobs lost during the recession won’t return. Companies have invested in technology and automation, making them more efficient and requiring new skill sets when they do eventually start hiring again.
In addition, unemployment is trending down faster than GDP growth implies, the result of many workers getting out of the job market and no longer looking for work. Fleming said that there are fewer people either working or looking for work now than there was in 2004. But it’s not all bad news, especially for those still looking for work.
“Those that are trying to look for work are seeing an easier time finding work,” Fleming said.
While gas prices are increasing, Fleming believes oil markets will have less impact on the overall economy.
The U.S. has reduced its dependency on foreign supply and oil use is more efficient. The country is a net importer of about 50% of its oil consumption, down from a peak of 60% in 2005.
“Oil is less of an issue today than it’s been before,” Fleming said.
