Housing and the economy won’t stay caught in their current “soft patch” much longer and are slowly headed for higher ground later this year and in 2012 and 2013, but conditions would be considerably brighter if leaders in Washington were adequately addressing what needs to be done to end the housing crisis, Kenneth Rosen, chair of the Fisher Center for Real Estate and Urban Economics at the University of California at Berkeley, told an audience at PCBC on June 22 in San Francisco.
“The recovery is happening,” said Rosen. “It just isn’t as strong as we’d like and housing is the weak link.”
The gross domestic product is likely to grow a subpar 2.4% this year compared to 4.0% “if housing were running on all four cylinders,” he said, and growth is likely to hit 3.0% for 2012, still below the 4% to 5% range that is typical for the early stages of an upturn.
A source of nagging concern for consumers, the job market has a long way to go, he said, with only about 2 million private-sector jobs gained following a loss of 8.8 million during the recession.
Job creation, which slowed down this spring, should be back on track in the fall, he said, and monthly gains this year should average between 175,000 and 200,000, roughly twice the pace of 2010. That would move the unemployment rate down to 8.9% by the end of this year and 8.1% at the close of 2012.
Unfortunately, the construction industry, which accounted for one-fourth of the nation’s job losses in a recession that was three times worse than any that preceded it, won’t be staging a comeback this year, he predicted.
If the economy bounces back in this year’s third and fourth quarters, as he expects, Rosen said that 10-year Treasuries should start moving back toward 4%, from about 3% currently, and subsequently rise into the 4%-5% range and higher.
The Federal Reserve should now be pushing its federal funds interest rate up to 2.5%, from close to zero, he said, noting that the central bank’s current stance is “not helping investors and savers,” who are receiving next to no interest, and is underestimating inflation.
Tight Mortgage Lending Standards
At this stage, Rosen said, single-family housing is struggling to recover because of overly tight credit conditions, and housing ought to be leading the economy forward. But “that’s not happening, as if no one in Washington cares anymore.”
(In a July 7 Washington Post news story on a town hall meeting via Twitter the previous day, President Obama was quoted as saying, “The continuing decline in the housing market is something that hasn’t bottomed out as quickly as we expected,” later adding that his Administration’s efforts to help struggling home owners were “not enough.”)
“There is a very big anti-homeownership bias coming out of Washington and we are going to have to fight for everything we have,” Rosen said.
Tight credit standards are housing’s biggest problem today. As the result of tight mortgage requirements, 30% to 40% of people who want to buy a home can’t, he said.
At the peak of the housing boom, when excessively easy credit prevailed and “anybody who could fog a mirror could get 100% financing” is the time when the banks should have been tightening. Now, at the bottom of the market, is when conditions should be loosened.
“It makes no sense whatsoever,” he said. In Washington, banking regulators “are not doing the right thing.”
He cited Lew Ranieri, the “godfather” of mortgage finance, and others who believe mortgage lending has become overly restrictive and who are “trying to get the ear of somebody, but there’s nobody to listen.”
Ordinarily, first-timers would be accounting for 50% of home sales, but “that’s down now because it’s harder to qualify,” Rosen said.
“The low-end consumer is not feeling very good,” he said, but there is “some light at the high-end of the housing market.”
In California — where San Francisco and the Silicon Valley are very strong, San Diego is slowly getting better, Orange County is suddenly somewhat better, Los Angeles is lagging and the Inland Empire and Sacramento are the weakest performers — homes are at their most affordable level in 20 years, he said.
“If you have 20% down and a high FICO score, now is the time to lock in financing, the cost of which will be going up over the next two years,” he said, raising the concern that mortgage rates could be ascending just as the housing recovery is shifting into high gear.
In the meantime, builders should be building 1.1 million single-family homes a year (compared to a yearly pace of 419,000 starts in May) and demographics ought to be supporting rising levels of demand, with 45 million echo boomers waiting in the wings to enter the job and housing markets over the next decade and 20% of the population nearing retirement.
New Policies Needed
Immigration is also an important part of the housing demand equation, and it could be buttressed by “stapling a green card to every foreign graduate” of a U.S. university. “We are giving up 1% of GDP a year because we are making it so hard for people [immigrants] to get here,” he said.
Attention also needs to be given to selling off the 1.6-million unit overhang of houses. “We need to clean them up and get rid of them, and get this done. But government doesn’t know how to do it,” Rosen said.
“I don’t see a big upturn until we get policy changes in Washington, maybe in 2013. In the meantime, they’re going to scapegoat the industry.”
Among the things that need to be done to put housing back on its feet, Rosen said that credit standards should be eased at Fannie Mae, Freddie Mac and the Federal Housing Administration.
Housing also needs to raise its profile. “If we solve the housing problem, we will really help the economy and job creation,” he said.
To solve the foreclosure “hangover,” Washington needs to pursue “a forceful foreclosure abatement policy working with the top 20 banks,” and that effort should be overseen by a “buck stops here” housing czar who can get the job done.
Arizona Coming Back Slowly
In addition to offering some encouraging news about improving economic conditions on the West Coast, Rosen observed that there are states beginning to do well — such as Texas, Alaska and North Dakota — and even areas whose economies have sunk to the bottom of the heap as the result of badly overheated housing markets during the boom are showing signs of progress.
From beleaguered Arizona, Elliott Pollack, CEO of Elliott D. Pollack & Company, said that that state’s recovery got underway at the start of this year, far behind the U.S. overall, and still has some serious mending to do to recapture lost population and jobs, “so it won’t be until 2013, ’14 or ’15 before things get good again.”
Foreclosures in the state are beginning to recede, he said, but remain very high and half of the home mortgages in Arizona are underwater. For the time being, “there are too many vacant homes and not enough household formations,” Pollack said.
The average price of a new Arizona home is far above the price of re-sales, which are dominated by foreclosures and short sales. Newly constructed homes are 170% more expensive, compared to 130% during normal times.
However, by 2015, re-sale home prices will be 50% higher than today, he predicted. “When the market clears, you’re going to start making money.”
“When the balloon re-inflates, this will all be a bad memory,” Pollack said, with Phoenix going from 6,000 new housing units a year back to 30,000 to 40,000. The boom “is out there somewhere,” he said.
John Silva, managing director and chief economist for Wells Fargo Securities, said that due diligence is in order because the fundamentals that drive the economy are changing. Manufacturers who have strong growth abroad have been grabbing hold of global economic growth to achieve solid profits, but small businesses are still languishing.
In the housing market, which “has been building bigger and bigger homes for smaller and smaller families,” demand is now veering in new directions, to smaller homes closer to the city.
“Commercial real estate is coming back in many areas,” he added.
Silva questioned the absence of a strong dollar policy in the U.S. “The dollar has been going downhill for seven or eight years,” he complained, generating stronger exports but also raising prices for U.S. consumers.
“We import more than we export in the U.S.,” he said, “so we are paying more for a weaker dollar.”