5 reasons the housing recovery remains wobbly

Here’s one offbeat indicator of a housing revival: RealtyTrac just published a list of the “top 25 markets for flipping homes.”

A few years ago, anybody buying a home to resell for a quick profit lost money instead, since home prices declined for six years straight, beginning in 2006. So if flippers are back, that’s at least one sign that buyers think prices will keep going up.

Some trends in the housing market justify such optimism: Sales, like prices, are up after bottoming out in 2010. Foreclosures and mortgage delinquencies are dropping sharply. And housing affordability remains terrific, thanks largely to near-record-low interest rates engineered by the Federal Reserve.

But it’s still a troubled housing market in many ways, as several panelists explained during a discussion I moderated for the recent Milken Institute Global Conference in Beverly Hills, Calif. Here are 5 signs the housing market is still far from healthy:

1. Good land is scarce: This might seem hard to believe in a huge country, in the aftermath of a housing glut, but real-estate developers say it is hard to find desirable land for new projects, at fair prices. Part of the problem is that banks took control of a lot of land when they foreclosed on development projects, and the land is now worth less than its original price – which means banks would have to write off additional losses if they sold it.

And lenders remain leery about making loans for land purchases. “Land is a defining element right now,” said Emile Haddad, CEO of the real-estate management firm FivePoint Communities. “A lot of land is hidden in drawers right now.” That limits the supply of new homes for purchase and also restrains job growth in the construction industry.

2. Flippers are at risk: Mortgage rates as low as 3.5 percent make houses a good bargain right now, but the equation could shift abruptly if rates rise, as some business leaders think is inevitable. “Buyers should be very cautious,” said Jeff Greene, president of Florida Sunshine Investments.

“No doubt you can buy a house today and get a really good price and a low-interest loan. But if you want to sell that house to somebody two or three years later and rates go up to 5 or 6 percent, how much is he going to pay for that house?”

If you end up living in the house for several years, however, rising rates could actually work in your favor, since they’re likely to be accompanied by higher inflation, which would boost nominal home values.

3. The recovery depends deeply on government aid: Virtually all mortgages written these days are backed by a government housing agency such as Fannie Mae or Freddie Mac. Beyond that, interest rates would probably be at least 2 or 3 points higher if the Fed weren’t pushing them down. “We’re in a financial repression,” says Jim Litinsky, founder of the hedge fund JHL Capital.

“Every asset is mispriced. But,” he adds, “of all assets out there, if you can lock in 30 year, 3.5 percent mortgage, that’s an incredible asset to own to ride the repression.”

4. Foreign buyers are helping boost prices: In top markets such as Miami, Los Angeles and New York, strong demand by foreign buyers has been one reason real estate prices have recovered. On one hand, that indicates faith in the U.S. market by buyers who could put their money anywhere. But it makes homes more expensive for Americans and could lead to another bubble, which could pop if interest rates rise rapidly.

5. It’s a very patchy recovery: Greene points out that while the Miami market is “on fire,” Palm Beach County, about 80 miles to the north, is still struggling with a “huge glut of housing.” And while home prices on average may be rising sharply, there are some regions – such as San Bernardino, west of Los Angeles – where the housing bust still hasn’t ended. Nobody will be flipping there.

SOURCE: “5 Reasons the Housing Recovery Remains Wobbly”, US News & World Report (May 3, 2013)