Skeptics question housing recovery

Those with big stakes in the housing industry appear to be champing at the bit to declare the recession over and recovery just around the corner.

Not as convinced are economists and observers outside the industry, who do not see a few months of comparatively positive sales and construction numbers as a guarantee that the worst is behind us.

Several reasons appear consistently in the skeptics' analyses: the tax credit for first-time buyers, interest-rate volatility, government intervention, continuing unemployment, and the steady stream of foreclosures and mortgage delinquencies nationwide.

In interviews, more than two dozen economists and experts elaborated on these points.

The $8,000 tax credit. Thus far, 370,000 home sales to qualified first-time buyers are attributed to this. But the incentive expires Nov. 30. Congressional leaders have pledged to extend it. The housing industry wants it extended, and expanded.

"The tax credit has clearly had a positive effect on housing demand," said Joe Robson, the National Association of Home Builders' chairman.

But some others said that, like "Cash for Clunkers," the credit is merely tapping pent-up demand.

"If all you have done is shifted home purchases that would have occurred anyway from the future into the present, that is simply moving home sales around rather than increasing their overall level," said economist Kevin Gillen, vice president of Econsult Corp. in Philadelphia.

Interest rates. Thirty-year fixed-rate mortgages are down to 4.87 percent. Rates tend to be volatile, however, and first-time buyers keep an especially close watch.

Brian Bethune at IHS Global Insight Inc. said of the rates: "There will be some gradual decline, but they are pretty much in place now."

Bankrate.com columnist Holden Lewis says he believes they will increase "simply because they're so low" now: "The 30-year fixed is near historic lows, which means that it has been higher than this almost every day in the last several decades, so it seems natural that it will rise."

Bethune, Lewis, and Mark Zandi, of Moody's Economy.com, all prominently mentioned the Fed's decision to stop buying Fannie Mae and Freddie Mac loans and mortgage-backed securities in March as one reason rates will not fall much more.

If the Fed slows purchases before then, rates may rise because investors will have to take up the slack, and they'll demand higher rates to "compensate for the perceived risk," Lewis said.

The housing market, Zandi said, "is showing improvement only because it is on government life support."

Though rates for conventional home loans are low, both the cost and requirements for "jumbo" mortgages - those above $417,000 - remain high and tight.

And though the Fed and the Treasury Department have thrown money and guarantees at lenders to get them to pry open their wallets to consumers and the housing industry, builders are dipping more deeply into their own purses, or not building at all.

Said the Home Builders Association's Robson, "There can be no meaningful economic recovery until the flow of credit is restored to housing."

Government intervention. With housing, the government is seen as both a solution and a problem.

On the one hand is real estate industry consultant John Burns' assessment: "Government intervention to date has been extremely helpful in preventing an even more dramatic decline in home prices."

On the other hand, in a report issued last week, the Congressional Oversight Panel monitoring the Obama administration's loan-tweaking Home Affordable Mortgage Program (HAMP) said it was focusing on the housing crisis "as it existed six months ago," when it was dealing with the fallout of the subprime loans, rather than addressing payment delinquencies caused by unemployment.

In a conference call Friday, Elizabeth Warren, who is chairwoman of the panel, said the program should be expanded since, as it is constituted now, it would not be doing enough mortgage modifications to make a dent.

HAMP, part of the administration's overall Making Home Affordable program, was rushed into place to try to reduce foreclosures. One of its goals, to have 500,000 trial mortgage modifications in place by Nov. 1, was reached Thursday, the Treasury Department reported.

But getting there has not been easy for anyone, mainly because the program was crafted in such haste. The 62 servicers that signed on were not prepared for the volume. For example, Wells Fargo & Co., with 8,000 employees at the outset, had to quickly hire 4,600 more, said senior vice president Joseph Ohayan.

Philadelphia Legal Assistance supervising attorney Irwin Trauss said the program "has not resulted in a significantly greater willingness on the part of servicers to enter into modifications that meaningfully reduce monthly payments."

"Servicers look for reasons to avoid making the modifications when they are most needed, rather than for opportunities to make them," he said.

Efforts to reform the home-appraisal system, in response to reports of systemic abuse during the housing boom, seem to have snarled things even more.

The new Home Valuation Code of Conduct, which went into effect in May for loans sold to Fannie Mae and Freddie Mac, "establishes standards for solicitation, selection, compensation, conflicts of interest, and appraiser independence."

But its critics - mortgage brokers, appraisers, real estate agents, and builders - say the result has been less-than-knowledgable appraisers valuing properties at a highly volatile moment for the market.

"Substandard appraisers from far away who are paid a low wage are doing bad appraisals, even though the costs of appraisals to the consumers have risen about 35 percent," said Philadelphia mortgage broker Fred Glick. "When the borrower is then rejected and has to go elsewhere, most times, the consumer has to pay for another appraisal."

On Nov. 2, still more new regulations are scheduled to take effect, changing the approval and processing guidelines for a condominium to be eligible for FHA mortgage insurance.

Rather than stimulating sales, they may have the effect of "reducing the point of initial entry of mostly young, first-time home buyers," said Philip J. Sutcliffe of Project Support Services of Lansdale.

Unemployment. "Unemployment, and underemployment, is the white elephant in the room," said Rick Sharga, chief economist for RealtyTrac Inc., which tracks foreclosures.

More and more foreclosure activity is related to job loss, and the wave of mortgage defaults caused by unemployment probably will not peak until the fourth quarter of 2010.

"High levels of unemployment also take buyers off the market. And the fear of unemployment will keep thousands of potential home buyers on the sidelines, reluctant to take on the major financial commitment a home purchase represents," he said.

There is discussion in Washington about a tax credit for businesses in return for hiring or restoring work hours.

Zandi of Moody's Economy.com is dubious. "Businesses will only hire if it helps increase production and sales," he said. "It may work if things improve next year and if it is part of a larger approach, but not by itself.

Foreclosures. Of the 53 million mortgages nationwide, 4.25 million are in foreclosure or headed there.

"We'll probably set another record for total foreclosure activity in 2010, and continue to have historically high levels of [bank repossessions] into 2011," RealtyTrac's Sharga said. "In a worst-case scenario, the banks could flood the market with these properties, driving overall home values down and creating a nasty double-dip."

More likely, he said, is that banks will continue to slow down the foreclosure process and very gradually release homes back onto the market.

That would prevent a major price falloff, but it would also ensure that the market recovery is marginal and slow - with prices not beginning to recover in a meaningful way until 2013.