NEW YORK — The ongoing credit crunch and misfiring economy leave little reason to expect a dramatic turnaround in housing in 2009 — regardless of steps the government is expected to take to head off a depression, a panel of industry experts said Wednesday during a "Bulls vs. Bears" session at the Inman Real Estate Connect conference.

Home prices remain unaffordable in many markets, and with unemployment headed up, it’s not realistic to expect lower interest rates on conforming loans will be enough to boost home sales.

Some panelists said measures being undertaken or weighed by lawmakers and policymakers — such as tax breaks or subsidized interest rates for homebuyers or "cram-downs" of bankrupt borrowers’ mortgage principal — may even do more harm than good.

"Credit is where this starts and ends," said Barry Ritholtz, director of equity research for Fusion IQ.

While there are plenty of numbers that tell the story of problems in hard-hit housing markets and the economy in general — falling home prices, rising foreclosures and unemployment, mounting losses at banks and financial institutions — Ritholtz offered an anecdote from a conversation with friends in the industry as an example of how tightened lending standards can have a ripple effect.

Ritholtz told the story of a recent transaction that involved a buyer with preapproved financing seeking to purchase a starter home. The financing on that deal fell through, derailing four other sales that depended on other buyers selling their existing homes. It was dominoes falling up the road," Ritholtz said, adding, "this is not uncommon."

He said he looks at three indicators that would signal a turnaround: median home price-to-income ratios, inventory, and the cost of renting versus owning.

Although home prices got far out of whack with incomes during the boom — "five standard deviations above normal" — they have come about 55 percent of the way back to normal, Ritholtz said. Although every region is different, when prices reach the level where a couple earning entry-level salaries can afford to buy a starter home, that will be an indication that the situation is on the mend.

Houses are different than stocks, Ritholtz said, in that "outside of Detroit and Love Canal" their prices usually don’t drop to zero. But the question remains whether home prices will revert to past norms or plunge even further than fundamentals might justify. Or, Ritholtz said, they could just remain flat for 10 years, until inflation brings wages and the price of other goods in line.

At nearly 12 months, the nation’s housing inventory is "really, really excessive," and another indication that a turnaround is not in sight, Ritholtz said.

If there’s a silver lining in Ritholtz’s views, it’s that many people are probably still better off owning a home than renting.

"If people understand the deal, and will be there for five to 10 years," they can still justify pulling the trigger and making a home purchase, Ritholtz said.

But at the macroeconomic level, there’s no point in even talking about a recovery yet, said Noah Rosenblatt, founder of the New York-based blog

"I think we should ask when are we going to stabilize," Rosenblatt said. "There is not going to be a V-shaped recovery" in which home prices rebound from a bottom, but a "muddled ‘L’ " with a long period where prices stay relatively flat.

The unwinding and de-leveraging of the financial system is going to take years to play out, Rosenblatt said. In the meantime, unemployment is on the rise and consumers are cutting back on spending and boosting savings in order to weather the storm. That creates a negative feedback loop for corporations that depend on consumer spending.

"Time is our best ally here — it’s going to play out over years, not months." Rosenblatt said.

Fear and trust are undermining consumer confidence, said Carter Murdoch, senior vice president of marketing and compliance for Bank of America.

"How many of you have customers who have said ‘I want to wait because prices are still coming down’?" Murdoch asked, prompting a large show of hands and some laughter in a packed ballroom at the New York Marriott Marquis in midtown Manhattan.

National Association of Realtors chief economist Lawrence Yun agreed that if prices overshoot fundamentals on their way down, that could impact economic growth, cause even more foreclosures, and lead to another "unnecessary second round" for the credit crunch.

That’s why government action is needed to counter "massive pessimism" and restore consumer confidence, Yun said, touting a package of incentives endorsed by NAR including increased homebuyer tax credits and government subsidies to lower mortgage rates for borrowers.

Yun emphasized that such aid would be aimed at getting fence-sitters who are qualified homebuyers back in the market, and that those not suited for loans would not be helped.

Murdoch dismissed such efforts as seeming like "a Band-Aid on a massive car wreck," predicting that unemployment could rise to 9 percent this year. The U.S. is already experiencing 10 percent unemployment if an older method of counting the jobless rate that includes those who have stopped looking for work is used, Ritholtz added.

Rosenblatt said there’s a price to pay for the Federal Reserve’s ongoing purchases of $500 billion in mortgage-backed securities issued by Fannie Mae, Freddie Mac and Ginnie Mae. The Fed’s "quantitative easing" amounts to printing money, which could fuel inflation and drive up prices of commodities and services like healthcare.

With price-to-income levels still elevated, homes remain unaffordable in some markets, Rosenblatt said. Government incentives to stimulate home buying slow the return of price-to-income ratios to historical levels.

"If unemployment continues to rise, how is that going to help?" Rosenblatt wondered.

With all the rescue plans and fixes proposed so far, "It’s really just the hair of the dog that bit you — low (mortgage) rates, high loan-to-value ratio," Ritholtz said.

Asked whether they would support proposals to grant bankruptcy judges the power to "cram down," or reduce the loan principal on a bankrupt borrower’s primary residence, or create a fiduciary duty for mortgage brokers, most on the panel had little enthusiasm for such measures.

Yun said he opposed bankruptcy cramdowns — which President-elect Barack Obama supported during his campaign but which have been stripped from housing relief legislation enacted by Congress — because they might result in higher interest rates.

Murdoch said that while he would not speak directly to either cramdowns or fiduciary duties for mortgage brokers, he expects "over-regulation will be a result" of the housing downturn and financial crisis.

Ritholtz said that while regulations imposed on businesses in the boom years after World War II had become an impediment by the 1960s, the pendulum then swung too far the other way resulting in "radical deregulation" of financial markets that led to the excesses in lending during the housing boom.

Loan originators were able to divorce themselves from risk by selling loans to Wall Street investment firms that bundled them into securities that were sought after by investors looking for better returns than Treasurys. When home prices collapsed and borrowers began defaulting, the losses on those investments and others tied to them rippled through the financial system, curtailing all types of lending.

In a follow-up question-and-answer session with Inman News founder and publisher Bradley Inman, New York Times reporter Andrew Ross Sorkin said he expects that a year from now, we will still be grappling with many of the same issues brought about by the credit crunch.

"What worries me is I don’t see the light at the end of the tunnel … that inflection point where we can get excited again," Sorkin said, warning of the danger of "another run, where Morgan Stanley and Goldman Sachs are back in the crosshairs" and the threat of another Great Depression looms.

Sorkin, who founded and edits the Times’ Dealbook blog, lamented that instead of spending most of his time writing about mergers and acquisitions, "I’m covering bankruptcies."


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