RealEstateEconomyWatch.com

As we begin the New Year, let’s look back before looking forward. Not since the Great Depression has America experienced such economic and financial deterioration in such a relatively short period of time.

The nation’s housing markets collapsed in 2007 and the U.S. financial system collapsed in 2008; both have been recovering ever since. The damage is well documented: two of the nation’s most respected investment banks, Lehman Brothers and Bear Stearns failed and the nation’s largest mortgage lender, Countrywide, went belly up. The two mortgage funding giants, Fannie Mae and Freddie Mac, were taken over by the federal government and are now under conservatorship. Goldman Sachs and Morgan Stanley sought safer harbor by becoming bank holding companies and the government bailed out our nation’s largest insurer, AIG, and then handed a bailout package to two of our largest automakers, General Motors and Chrysler. We’ve been in revival mode ever since, particularly the housing markets.

A host of housing stimulus and foreclosure mitigation programs was implemented during the past several years. FHA Secure, Hope Now and Hope for Homeowners, the Home Affordable Modification Program and the homebuyer tax credit and its extension, to mention a few; some were effective, some were not.

The U.S. economy was in recession throughout 2008 and the first half of 2009. The economy has gained momentum since but not nearly enough to generate healthy job growth to support a wholesome, growing economy; real GDP grew by only 2.6 percent in the third quarter of 2010, while unemployment posted a 9.4 percent rate in December 2010.

As for the nation’s housing sector, home sales plummeted by well over 30 percent over the past four years, while new residential construction plunged in excess of 65 percent over the same period. According to the Case-Shiller Home Price Index, home values fell over 30 percent for the nation as a whole during the 2006 to 2010 period; and is expected to fall further this year. Some metros like Las Vegas, Phoenix and Miami took it on the chin, with home values diving 55 percent, 46 percent and 42 percent, respectively during the same period.

Of course, foreclosures have been front and center in the housing markets during the bust years, attaining record filings and sales with each succeeding year. As of this writing, 1 out of 381 housing units are a foreclosure filing.  Five states account for over half of foreclosure filings: California, Florida, Michigan, Illinois and Arizona. With mortgage delinquency rates hovering near record highs, 2011 is likely to be another year of the foreclosure.

On the positive side, mortgage rates fell precipitously throughout the period, with the thirty-year mortgage rate currently hovering near 5 percent, close to a record low. Similarly, affordability conditions improved sharply during the same period with the National Association’s Affordability Index close to record highs today due to falling mortgage rates and falling home prices. The housing sector is well positioned for an ascent if the nation’s job and income situation improves.

Looking ahead, 2011 promises to be a year filled with caution and hope. The economy is mired in a modest expansion and the financial markets remain overly cautious with restrictive credit conditions.  Payroll employment gains increased far less than expected in December, with a net gain of only 103,000 jobs; a major disappointment.  The economy created on average 94,000 jobs a month last year, well below what is needed to keep pace with population growth as well as absorbing unemployed households back into the workforce.

Companies are not yet comfortable with the potency of the recovery to commence hiring again. Despite a dreary employment performance over the remaining months of last year, payroll employment is likely to strengthen this year due in part by the tax agreement achieved between the Obama administration and Congress last month. It’s possible that employment gains could average about 250,000 per month during the second half of the year.

Federal Reserve Chairman Ben Bernanke’s recent testimony before the Senate Budget Committee offered little indication that the central bank is contemplating tighter monetary policy any time soon so interest rates are likely to remain low throughout the first half of this year. The Federal Reserve remains concerned about a sluggish labor market.  

Recent data indicate the recovery is gaining a stronger foothold; retail sales jumped 0.8% in November in total, on top of an upwardly revised 1.7% gain in October; auto sales ended the year with a seasonally adjusted annualized sales of 12.55 million units in December, the strongest pace since September 2008. Consumers are spending again but with some reservation. The Conference Board’s consumer confidence index declined 1.8 points in December, to 52.5, counter to expectations of a gain. The confidence index has been basically flat for the past 18 months.  Although some economic indicators are picking up, consumers remain uncomfortable about their economic situation.

The housing outlook for 2011 is very much dependent upon the performance of the economy, job market and the pipeline of foreclosures. Homebuilders remain cautious due to a sluggish labor market; housing starts have been lifeless for the past two years, hovering below a 600,000 unit pace since the beginning of 2009. Residential construction is expected to gain only modest traction in 2011 due to less-than robust job gains expected this year and to a disproportionate amount of distressed sales. Foreclosure moratoriums which created robo-signing problems were a short-term fix; when the robo issues are resolved and the moratoriums are lifted, supply will be in excess once again.

On the demand side, home sales-new and existing-are expected to post modest gains throughout the year. The key drivers of housing demand: jobs, income and confidence, are not expected to break out of last year’s funk anytime soon. And a homebuyer tax credit is not in the offing this year to provide a temporary boost in housing demand like it did in the first half of 2010.

2011 will likely be an improvement over last year, but a full recovery in housing is not in the cards. A less than stellar economy combined with an excessive amount of distressed sales and depressed home values will keep a full fledged recovery at bay.

A genuine housing recovery is possible in 2012.  Today’s solid fundamentals are creating favorable housing conditions for tomorrow: low mortgage rates, near record affordability, a lean inventory of new residential construction and cyclical lows in home values. Everything is riding on what I believe is likely by next year, a healthy economic expansion. Here’s hoping for a happy outcome.