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Lawrence Yun, the chief economist of the National Association of Realtors, captivated and educated almost 800 Denver-area Realtors and other housing officials during a presentation on a wide-range of housing and economic topics.
He also confirmed that the Denver-area housing market is in better shape than most places, and is poised to recover at a faster clip.
Overall, he said in the Denver area on Wednesday, that the housing market is likely to trade a “vicious cycle” for a “virtuous cycle,” in which supply and demand are much more in balance.
“Right now, the market is trying to get back to normal,” Yun said.
Topics he discussed during a 90-minute talk at the Ramada Plaza Hotel in Northglenn, included:
- Life after the expired tax credits
- Foreclosures
- The government’s $600 bond buying spree
- Risks of inflation and deflation
- Preserving the home mortgage deduction
- The shadow market
- Fannie Mae and Freddie Mac
- Timelines for a housing recovery
Yun also was bullish on the Denver area and Colorado.
“A long-term trend is that people want to move to Colorado,” Yun said at one point.
Yun was brought to Denver by the Denver Board of Realtors, the Jefferson County Association of Realtors and the North Metro Denver Realtors Association. Additional sponsors were Land Title Guarantee, Metrolist and Bank of America. Yun also granted a 30-minute private interview to and independent Realtor, Gary Bauer.
“It’s hard to imagine today, but as early as 2011, we could see some degree of a housing shortage,” Yun told InsideRealEstateNews. “I know it does not feel that way. We are out of the recession, but consumers don’t buy it. What is different this time, is that people are losing their belief in the future.”
But he noted that home-building in the Denver area, as well as from Boulder to Fort Collins, is at a 40-year low, at a time when the population continues to grow.
“Construction also has come to a halt in places like Detroit and Cleveland, but I would say they are going to be facing housing shortages, because those are out-migration states,” Yun said. “That is, people are leaving. The Rocky Mountain states, such as Utah and Colorado, tend to be in-migration states – that is people continue to move here, in addition to the normal growth rate and people graduating from high school.”
Still, there are challenges, he noted. In a typical year, there are about 400,000 foreclosures a year because of people losing their jobs, divorces, and health problems. The last few years, the county has suffered from about two million distressed properties entering the market annually.
“That is five times the normal amount,” Yun said. But he said that Denver, where the foreclosure cycle began earlier that most places of the country, is not seeing the foreclosure rates as many other spots.
Denver dodged over-building
“Denver’s foreclosure rate is about half the nation’s,” Yun said. “The other thing is that Denver is one of the few cities where over-building
occurred before the housing boom and bust. You did not see the huge overbuilding at a time when other markets such as Phoenix and Las Vegas were expanding rapidly.”
And homes in the Denver area are more affordable, because of softer prices and near historic low mortgage rates. A typical monthly mortgage in Denver has dropped $257 a month to $935 from $1,922 in 2005, he said. In San Diego, the difference is even more dramatic, dropping to $1,564 from $2,833.
Nationally, about a million jobs have been added to the economy, following two years of losing five million jobs each year. If the economy would add 400,000 jobs a month, it would take slightly more than two years for the housing market to return to a more normal one, he said. However, he said he expects more modest gains of 1.5 million jobs next year
Tax credits did their job
And although home sales in Denver dropped off following the end of the tax credits, Yun said that occurred nationwide, and was expected.
“The tax credits worked,” Yun said. “Nationally, it brought about one million buyers into the market, who would have not bought otherwise. Now, about 4 million people bought, who would have bought in any case, and for them it was an $8,000 bonus. We knew that housing sales would fall off when they ended, and they had to end. After all, who would buy a home in May, when they could get $8,000 back by buying in April? Consumers are smart and rational.”
The tax credits also helped reduce the supply of homes on the market, and helped stabilize prices, especially at the lower-end, he said.
Robo-signings to be resolved
Meanwhile, he thinks the banking industries problems revolving around faulty foreclosure paperwork will be resolved within the next couple of months.
“The banks were sloppy with paperwork and with things such as robo-signings, but they are remedying it,” Yun said. “At the end of the day, I do not think we are going to find too many homeowners who were facing losing their homes who are actually current on their mortgages. I was concerned at first that the government was going to force a moratorium on foreclosures on banks, which would have created an overhang of distressed homes on the market and slowed the recovery. But I don’t think that is going to happen.”
He also doesn’t think the homeowners who may not have made a payment in 18 months or so, but still haven’t lost their home to the banks, will be able to keep them because of problems with the paperwork.
“I don’t think many people think you should be able to stay in your home when you haven’t made a mortgage payment for 12 months or 18 months,” Yun said in the interview with InsideRealEstateNews. “A home is too valuable of an asset for banks to let that happen. I think they will work out all of the title and ownership issues. It would be utter chaos if people could keep their homes under those circumstances.”
However, he said that distressed homeowners are facing confusing choices when they are seeking a loan modification, and are being encouraged to let their home slip into foreclosure, to facilitate that. And if they do not get the lower payment, they may lose the home.
In addition, there is a certain “moral hazard” of rewarding people with lower rates who defaulted on mortgage payments, while others continue to pay their mortgages, he said. In some government-backed mortgage reduction programs, as many as 50 percent of the borrowers still end up defaulting on their loans, which also is troubling, he said.
Also, while mortgage rates are still hovering near records lows, a big part of that appears to be that banks are only lending to the best customers – those that have great credit scores and have almost zero risk of default. He said that FHA-loans made this year have the lowest default rates on record and “vintage 2009 and “vintage 2010 loans purchased by Fannie Mae and Freddie Mac have lower default rates than loans made in 2002, prior to the housing boom and bust. “Bad loans are almost always made in good times,” Yun said. He said that banks, accruing huge stockpiles of cash, must loosen underwriting. Lending was too loose during the go-go days that led to the crash, “and now the pendulum has swung too far,” he said.
Also, Fannie Mae and Freddie Mac have to return to their knitting, but should not be eliminated, as some have demanded, he said. They play an important role of providing a steady source of mortgage money. Before they were taken over by the government, they were acting like hedge funds, making risky bets on the housing market, he said.
No fan of $800 billion buying spree
But he is not a fan of the government’s plan to spend $800 billion in bonds, which was expected to drive down interest rates, but at least initially is causing them to rise.
“I was not really in favor in what they call quantitative easing, or QE2,” Yun said. “The government thinks it can just turn on the printing press and get a free lunch. But there are consequences.”
One of the potential consequences is inflation, he said. Consumers are not feeling it, but there has been rising inflation at the production side, as well as at the commodity level, as everyone has seen with gold seemingly hitting new highs almost daily.
“If cotton prices keep rising, at some point Wal-Mart will have to charge more for shirts,” Yun said. He said the government embraced QE2 was because of concerns about deflation, in which prices fall. That leads to consumers to wait for even lower prices, which causes prices to fall even more. Deflation has kept the standard of living in Japan at basically the same level for 20 years, he said.
Mortgage deduction safe
But one thing Yun does not see happening is the elimination of the mortgage deduction as a way to reduce the federal deficit. The chairman of a bipartisan White House committee recently raised that as a possibility.
“I’m not surprised that it was put on the table,” Yun said. “But the mortgage deduction has been embedded in American culture for generations. It has a great deal of support from taxpayers.The U.S. economy cannot recover if the housing economy does not recover. If the mortgage deduction is removed, it not only hurts people who own homes, but those who have paid off their mortgages and own their homes free and clear.”
He estimated that would lower the value of homes without mortgages by 15 percent.
“I can’t see any politician supporting the destruction of wealth at the scale,” Yun said.
And while there may be as many as 1.5 million homes waiting to hit the market – the so-called shadow market – he said there has been plenty of investor appetite for those properties. The shadow market is typically described as properties owned by banks, or soon to be owned by banks, that are not yet on the market.
American Dream alive
But despite the recent turmoil in the market, he said he still thinks owning a home is the American Dream.
“When we survey renters, the vast majority of them still say they want to buy a home at some point,” Yun said. “Now, some young people might not want to buy at this time. They want to remain flexible in finding a job, they may not have married and started a family yet, or their careers are not yet where they want them to be.”
He also noted that the net wealth of most renters is a fraction of most homeowners, even after the housing crash. During the presentation, he suggested to Realtors that they show the graph he was displaying comparing the meager wealth of renters to owners to prospective buyers on the fence.
Not only has the American Dream of owning a home not gone away, but it is returning to its roots. Buyers today and in the future are signing on the dotted line because they want to be near work, or near schools, or a place to raise their families.
“The great thing about owning a home, as you pay down your mortgage, it usually goes up in value and over time, you build wealth,” Yun said. “But people will not be buying homes with the idea they will be $10,000 wealthier (on paper) next year. Appreciation will be a side benefit.”
