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Home | News | Foreclosure | Housing Recovery Is Sustainable, According to Market Analysts
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Housing Recovery Is Sustainable, According to Market Analysts

Despite a number of potentially damaging headwinds, the ongoing housing recovery will remain sustainable for the foreseeable future, analysts for ""Capital Economics"":http://www.capitaleconomics.com say in a recently released report.

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The housing industry's rapid rebound took many experts by surprise-even the researchers who authored the report admit they ""have been slightly taken aback"" by the recovery's speed. However, they point to several major indicators that show the current upturn is more than a temporary blip or a false recovery.

Sustained rises in demand, home prices, homebuilding activity, and new and existing-home sales all demonstrate that the market is seeing a lasting recovery, they say. They also forecast further price growth of 5 percent in each of 2013 and 2014.

What's more, even as prices rise, valuation and affordability-""the cornerstone on which the improvement in housing is being built""-remain very favorable.

The major threats to the market at this juncture, the analysts say, are the potential for a new American recession (brought on by complications from the fiscal cliff and the potential of a partial euro-zone break-up) and the risk that properties in the shadow inventory will flood the market and drive prices down.

As far as the economy is concerned, Capital Economics' working assumption is that Washington will avoid throwing the country into another downturn. Beyond that, the firm notes that trade links between the United States and Europe are relatively small, and the financial links aren't significant enough to tip the country back into recession should the euro-zone see problems.

Turning to the shadow inventory, analysts estimate that the backlog of homes at risk of coming onto the market may be as large as 3.8 million (1.5 times the number of properties actually for sale). If those homes were allowed on the market too rapidly, supply would balloon and disrupt the price recovery-but they don't expect that to happen.

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""The signing of the $25bn foreclosure settlement has not led to a wave of foreclosures hitting the market,"" the economists write. ""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.""

Of bigger concern is the recovery's dependence on investors and cash buyers. According to Capital Economics, ""[m]ortgage-dependent buyers have made next to no contribution to the improvement in housing market demand,"" mostly because of tight credit. Instead, it's been buyers and investors-who are less dependent on mortgage finance-who have driven much of the recovery so far.

The problem, though, is that investment buying won't last as discounts start fading. According to data from ""Zillow"":http://www.zillow.com, the availability of deeply discounted foreclosures has been dropping sharply in states most targeted by investment buyers. While the trickle of properties from the shadow inventory will keep some bargains on the market, cheap, high-yielding homes are disappearing.

In fact, the analysts note, some of the most popular investment cities (such as Phoenix) are quickly becoming ""no-go"" areas for institutional buyers as the local markets recover. Even though the number of ""overheating"" cities is fairly small, there is a lesson to take away from those markets.

""What should be clear from all this is that the housing recovery cannot be driven by investors indefinitely,"" the report says. ""The very recovery that investors are driving will eventually price them out of the market.""

In order to keep the market healthy, credit conditions are going to have to loosen so the current heightened demand can actually make an impact.

According to a recent survey released by the Federal Reserve, one of the biggest factors keeping today's credit market tight is the risk of put-back requests from ""Fannie Mae"":http://www.fanniemae.com and ""Freddie Mac"":http://www.freddiemac.com. However, as the economy shows improvement and mortgage delinquency continues to fall, Capital Economics anticipates put-back risk will fade.

""All in all, if we are right that the economy will continue growing, it's reasonable to expect lenders to loosen the reins somewhat. The upshot is that we think mortgage-dependent buyers will gradually play an increasing role in the housing market recovery,"" the report says.

""The bottom line is that the U.S. housing recovery is sustainable. The key point is that the fundamentals of housing valuations and affordability are very favourable, reflecting a market that has adjusted.""

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About Author: Tory Barringer

Tory Barringer
Tory Barringer began his journalism career in early 2011, working as a writer for the University of Texas at Arlington's student newspaper before joining the DS News team in 2012. In addition to contributing to DSNews.com, he is also the online editor for DS News' sister publication, MReport, which focuses on mortgage banking news.

One comment

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    Mikel Armenta 0.00 (Rep Points)

    Fannie Mae and Freddie Mac, It is a government-sponsored enterprise (GSE) and public company, though it has been a publicly traded company since 1968. Fannie Mae is supporting today’s economic recovery and laying the foundation for a better housing finance system. Source of article: bad credit loan not payday loan

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