Assume that the European debt crisis doesn’t derail a global economic recovery in 2012 and the U.S. continues on a modest growth path next year. The question for those earning a living as real estate brokers and agents then becomes whether that little ray of sunshine will firm home prices and boost sales.

According to many analysts, the answer is: Don’t get your hopes up, at least not until 2013. While some forecasters see a turnaround beginning next year, more think home prices and sales won’t begin to climb back toward their historical trendlines in earnest until 2013.

Local housing markets may thrive or falter regardless of what’s happening at the national level. But at the macro level, there are two factors weighing on home prices and sales — one on the demand side of the equation, the other on the supply side — that may only ease with the passage of time.

On the demand side, mortgage analytics provider CoreLogic estimates 13 million homeowners have little or no equity in their homes. As much as those homeowners may want to trade up, downsize, or relocate to another market, most won’t be in the market to buy anytime soon, because it will be difficult or impossible for them to sell their current homes.

Many who are deeply underwater will end up losing their homes to foreclosure — in some cases making a strategic decision to default — emerging from the process with damaged credit and unable to qualify for another loan. Those who fall behind on their loan payments but get back on track after being granted a loan modification may also end up with damaged credit.

Other homeowners with no equity will continue to pay their mortgages, in the hopes that they’ll be above water again someday. In the meantime, they’ll be stuck in the homes they own.

Before the boom, homeowners typically moved every 7 years, and typically refinanced their home at some point, said Mark Fleming, CoreLogic’s chief economist.

"That natural turnover generated home sales and mortgage transactions," Fleming said. "The negative equity and insufficient equity situation we have these days mutes that turnover, and creates a new normal for the next 5 to 10 years of reduced sales and mortgage turnover."

On the supply side, loan servicers are expected to continue clearing the logjam of homes moving through the foreclosure process as they put the robo-signing crisis behind them. So even as the economy improves, lenders may well be pushing record numbers of "real-estate owned" (REO) homes they’ve repossessed back onto the market.

According to the latest numbers compiled by Lender Processing Services Inc., lenders were moving a record 2.2 million homes through the foreclosure process at the end of October.

As those homes are approved for short sales or repossessed and put on the market, that could put further pressure on home prices, which double-dipped in 2011 after getting an artificial boost from the federal homebuyer tax credit in 2010. If there was a bright spot in the LPS report, it was that the number of borrowers who were behind on their loans by at least 90 days but who were not yet in foreclosure was down 42.5 percent from a peak of 3.06 million in January 2010.

CoreLogic estimates that the "shadow inventory" of distressed homes not yet on the market but destined to be put up for sale stood at 1.6 million homes at the end of October — a five-month supply of homes at the current rate of sales. Half of those homes were located in just six states: Florida, California, Illinois, New York, Texas and New Jersey.

Some shadow inventory may be diverted from housing markets as Fannie Mae, Freddie Mac and FHA gear up to begin bulk sales of repossessed homes to investors who would rent them out.

Home prices in many markets have already seen double-digit declines from their peaks during the boom, and mortgage rates are at record lows. That means that in some places, homes have never been more affordable, which should boost demand.

But the prospect of further home price declines is keeping some would-be homebuyers on the fence — particularly those who are worried that they could still be laid off.

Mortgage giant Fannie Mae polls consumers each month to assess their attitudes about homeownership and renting, the economy, and household finances.

In the most recent consumer survey, taken in November, only 16 percent said they felt the economy was on the right track, down from 31 percent at the same point in 2010.

"Consumer sentiment went very south in July and August, and it has stayed south," said Fannie Mae Chief Economist Doug Duncan.

Consumers understand that homes are affordable — Fannie Mae’s survey showed 68 percent think it’s a good time to buy a home. But Duncan said there’s little sense of urgency among would be homebuyers, because many believe that neither home prices or mortgage rates are on the verge of rebounding anytime soon.

Three out of four consumers surveyed by Fannie Mae in November said that in the next 12 months, they expected home prices would stay the same (53 percent) or fall (22 percent).

Most weren’t worried that mortgage rates will go up during the same period , either, with 49 percent expecting they will stay the same and 12 percent thinking they may go down. Only 33 percent thought mortgage rates might be headed up in the next year, down from 51 percent at the same point in 2010.

Consumer instincts about home prices and mortgage rates are shared by many experts.

A panel of economists, investment advisers and housing industry analysts polled by Pulsenomics LLC in December predicts that national home prices will finish 2011 down 1.97 percent for the year, followed by a 0.18 percent drop in 2012.

The Pulsenomics survey, commissioned by Zillow Inc., predicts the S&P/Case-Shiller National Home Price Index will appreciate by 1.75 percent in 2013, followed by steady annual appreciation of 2.7 percent to 3.3 percent through 2016. That’s a "sluggish recovery scenario" with slower price appreciation than what was considered the norm before the housing bubble, said Pulsenomics founder Terry Loebs.

Mortgage rates are largely a function of demand for mortgage backed securities (MBS), bonds backed by home loans that are viewed as a safe haven by investors. Rates have stayed low because demand for such bonds pushes their yields — and mortgage rates — down.

The Federal Reserve initially helped push mortgage rates down by buying up $1.25 trillion in MBS in a program that wound down in March 2010. While some anticipated mortgage rates would rebound when the Fed stopped buying mortgage bonds, the European debt crisis has kept them in favor with investors. Mortgage rates hit new lows in 2011 even without the Fed’s support.

Mortgage rates could always shoot up again if the global economy suddenly blooms and inflation becomes a concern. But that’s seen by many as a distant risk. To encourage borrowing, the Federal Reserve has lowered short-term interest rates to next to nothing, and indicated it’s likely to keep them there at least through mid-2013.

The Fed’s policy to keep the federal funds rate at or near 0 percent doesn’t have a direct impact on long-term interest rates or mortgages. But the fact that the Fed has promised not to unleash its most powerful inflation-fighting tool any time soon does suggest that economic growth — and mortgage rates — will stay low.

Duncan and his team of economists at Fannie Mae project that rates for fixed-rate mortgages will average 4.0 percent in 2012 and 4.3 percent in 2013, down from 4.5 percent this year and 5 percent in 2009.

In a Dec. 16 forecast, the Mortgage Bankers Association predicted that rates on 30-year fixed-rate loans will average 4.2 percent in 2012 but rise to 4.7 percent in 2013. In its most recent forecast, the National Association of Realtors projected that 30-year fixed-rate loans will hold steady at 4.5 percent in 2012.

Buyer and seller disconnect

The University of Michigan’s Survey of Consumer Attitudes shows a strong inverse relationship to home-buying sentiment and mortgage rates.

In a study sponsored by the Mortgage Bankers Association’s Research Institute for Housing America, Syracuse University Professor Gary Engelhardt recently analyzed 30 years of data from the University of Michigan surveys.

Engelhardt found home-buying sentiment took a sharp dive in the late 1970s and early ’80s when mortgage rates soared above 15 percent, and fluctuated throughout the 1990s. When rates went up, home-buying sentiment went down, and vice versa. In the last decade, however, home-buying sentiment has seen some big ups and downs, even though mortgage rates have been on a mostly downward path.

There’s also a correlation between home-buying sentiment and home prices. But Engelhardt found that changes in home-buying sentiment tend to lead price changes. In other words, home-buying sentiment starts to rise before prices go up, and go down before prices fall.

Engelhardt says that what distinguishes the current recession from past events is a dramatic decline in the sentiment of home sellers.

While surveys show consumers believe home price declines and low interest rates have created a buyers market, homeowners see the odds as stacked against sellers.

The University of Michigan’s Survey of Consumer Attitudes showed that the percentage of homeowners who think it’s a good time to sell has dropped to a historic low of around 7 percent, down from 40 percent to 60 percent from 1992 through 2005.

Source: "The Great Recession and Attitudes Toward Home Buying," Research Institute for Housing America

That’s created a disconnect between the expectations of buyers and sellers.

"This low sentiment on the sell side is strongly related to difficulty in finding buyers at desired sales prices," Engelhardt concluded. "In economic terms, as market values have fallen, potential sellers have not adjusted their reservation prices downward fast enough to bring buyer and seller sentiment in line with one another."

Engelhardt notes that underwater homeowners can’t adjust their asking price much below what they owe on their home. Others who may have the freedom to do so may be averse to selling their homes at a loss.

Sellers, he notes, "now hold a highly leveraged option that pays off with any future increase in prices. This means there may be increased value in waiting, either to initially list, or to keep, the property on the market."

This reluctance on behalf of homeowners to lower their expectations could keep prices high enough "to drive a substantial wedge between buyer and seller sentiment," Engelhardt warns — a situation that could be exacerbated by the weak job market.

When the gap between buyer and seller sentiment closes, home sales will pick up, Engelhardt predicts. When that happens, he expects sales will rise more rapidly than prices, because any upward pressure on prices will bring more sellers who have been waiting for conditions to improve back into the market.

"Overall, there is little reason to believe there will be substantive increases in home prices in the near term," until seller’s expectations and actual home prices are better aligned, Engelhardt concludes.

Economists’ forecasts

If housing markets face substantial headwinds, that could also crimp overall economic growth. While housing construction has historically led the nation out of past recessions, the housing industry will be hard-pressed to lead the charge this time around.

Although new housing starts rose for the second month in a row in November, most of the 24 percent annual growth reported by the Department of Commerce was due to an increase in multifamily projects.

Single-family housing starts were up 2.3 percent from October to November, to an annual pace of 447,000 homes, off slightly from the 454,000-a-year pace seen in November 2010.

"Rather than indicating optimism about the housing sales market, the data on housing starts and permits point to optimism about the apartment rental market," Yahoo! Finance economics editor Daniel Gross concluded.

At 685,000 units per year, the pace of combined single- and multifamily housing starts in November falls well short of the 1 million units a year analysts say is normally needed to keep pace with demand, and the 2.27 million units a year pace seen in January 2006.

In commentary accompanying their latest economic forecast, Fannie Mae economists said they think multifamily housing starts will rise by 35 percent in 2012, boosted by a continued decline in the homeownership rate. Single-family housing starts are expected to rise by a more modest 5 percent.

Although early indications are that the economy picked up in the fourth quarter of 2011, Fannie Mae economists expect that momentum to slow. The European debt crisis remains the biggest risk to the U.S. economic outlook, they said, and Europe is probably already in a recession that will last through the first half of 2012. China is also a worry, with exports to Europe down and the country’s property market cooling.

Trade with Europe is "not hugely important" to the U.S., Duncan told Inman News, "but at the margin it’s one part of growth."

The bigger concern posed by the European debt crisis, he said, "is a disorderly meltdown in the financial system. Whether that threatens our institutions or leads to tighter credit conditions, either way, it’s a negative for us."

If the European crisis intensifies and threatens U.S. economic expansion, Fannie Mae economists think the Fed will stand ready to resume its MBS purchases in an effort to bring down mortgage rates.

The big risk to the U.S. economy is uncertainty in the policy arena, Duncan said.

With Congress having failed to agree on a plan to cut the budget deficit by $1.5 trillion over the next 10 years, the U.S. could see its credit rating downgraded next year, Fannie Mae economists warn.

At the same time, cutbacks in government spending — including a scheduled increase in payroll taxes and reduction in unemployment benefits — will restrain growth, Duncan and Orawin Velz said in commentary accompanying their latest forecast.

Consumer spending is the biggest component of the economy, and that’s affected by employment, household income, and savings rates.

Although the official unemployment rate fell to 8.6 percent in November — its lowest level of the recovery — Fannie Mae economists expect it to bounce back and average 9 percent in 2012, because job creation will be too weak to offset new workers coming into the labor force.

Although consumers saw their disposable income drop in the second and third quarters, spending was up, and Fannie Mae economists are concerned that the savings rate dropped to 3.8 percent in the third quarter — the lowest level since the tail end of 2007.

On the housing front, Fannie Mae economists say things are moving in the right direction, but that the housing market recovery is likely to remain "subdued" next year.  They predict sales of existing homes will be flat in 2012, before picking up by 4.6 percent in 2013. Mortgage originations are expected to shrink by $1 trillion as refinancings dry up.

Economists with the Mortgage Bankers Association have similar expectations, predicting sales of existing homes will show negligible growth in 2012 but rise 5.3 percent in 2013. MBA economists predict a home price index maintained by the Federal Housing Finance Agency will show 0.7 percent appreciation in 2012 and 3.7 percent appreciation in 2013. Fannie Mae economists expect home prices, as reflected by the FHFA index, to fall 0.8 percent in 2012 before appreciating by 2 percent in 2013.

Because the FHFA index only tracks homes purchased with mortgages backed by Fannie Mae and Freddie Mac, it can understate ups and downs in home prices.

The panel of economists, investment advisers and housing industry analysts polled by Pulsenomics LLC in December held widely divergent views on future price appreciation.

The most optimistic quartile of the group predicted 18.3 percent growth in the S&P/Case Shiller U.S. National Home Price Index during the next five years. The most pessimistic quartile projected a 1.4 percent decline.

John Brynjolfsson, chief investment officer with the investment management firm Armored Wolf, for example, expects the index to fall 10 percent in 2012 and 5 percent in 2013, and not rebound until 2015.

Mark Zandi and Celia Chen of Moody’s Analytics predict the index will fall by 0.89 percent in 2012, but rebound dramatically after that — by 5.27 percent in 2013 and 7.04 percent in 2014.

"The five-year housing correction that has brought prices down more than 30 percent since the top of the market in 2006 has been painful, but it puts housing on a firm foundation on which house price appreciation can build," Chen said in an opinion piece published on Moody’s "The correction has gone so far as to overshoot the fundamental value of housing."

The price-to-income ratio — a key long-term driver of house prices — has dropped 13 percent below its 1990 to 2003 average, Chen noted.

"With house prices as underpriced as they are, and economic growth to strengthen, the coming rebound will be a strong one," she concluded.

Policy considerations

Although world governments have appeared powerless at times to steer the global economy out of the doldrums, there are a number of policy issues specific to housing that could help or hinder housing markets.

Much of the debate in the policy arena is likely to occur in two areas: mortgage lending and incentives for homeownership.

The real estate industry has been up in arms over proposed risk retention requirements that would require lenders to retain a 5 percent interest in all but the most conservative loans. Critics say borrowers who don’t meet minimum down payment requirements would pay higher mortgage rates.

As lawmakers debate the future of Fannie Mae and Freddie Mac, there’s also a possibility that fees on loans guaranteed by the companies will go up — an idea backed by the Obama administration in early 2011 as a way to boost private mortgage lending.

The premiums charged by the Federal Housing Administration for mortgage insurance could also be headed up again, as the FHA gears up for increased claims on loans made during the boom years.

Lawmakers decided to restore FHA’s ability to insure loans of up to $729,750 in high-cost markets, but allowed the "jumbo conforming loan limit" for Fannie and Freddie to step back down to $625,500 on Oct. 1 over the objections of industry trade groups. 

The real estate industry has also objected to proposals to tinker with the formula for the mortgage interest deduction, which allows homeowners to deduct the interest expenses on their mortgages from their income.

To help underwater borrowers regain an equity stake in their homes, FHFA in October announced changes to the Home Affordable Refinancing Program intended to help homeowners refinance into lower-interest loans.

A homeowner paying 6.5 interest on a $200,0000, 30-year mortgage on a home worth only $160,000, for instance, would be able to pay their loan balance down to that level in 5 1/2 years by refinancing into a 20-year loan at 4.5 percent interest, without raising their monthly payments.

HARP is only available to homeowners whose mortgages are backed by Fannie Mae and Freddie Mac, and so far lenders have been reluctant to refinance borrowers with loan-to-value ratios above 105 percent. The latest revisions to the HARP program are intended to increase participation by lifting a 125 percent LTV cap and exempting participating lenders from "reps and warranties" that protect Fannie and Freddie from losses on defective loans.

Fannie Mae economists say the impact of HARP refinancings will depend on economic conditions including home prices, interest rates, and labor market conditions, but that the program should generate $200 billion in refinancings by the end of 2013.

CoreLogic’s Fleming noted that loan servicers are free to come up with their own programs to help underwater homeowners in order to prevent strategic defaults.

Ocwen Financial Corp., for instance, is offering shared-appreciation mortgages, in which lenders agree to reduce a borrower’s mortgage principal in exchange for 25 percent of any appreciation when a house is refinanced or sold.

"No single program is ever going to really be big enough" to address all of the issues holding back housing markets, Fleming said. "It will be some combination of things, including time, and an ever-growing economy, that will help."

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