Mounting Indicators Prove Housing ‘Recovery’ Illusory

BLOG VIEW: With the national unemployment rate around 5.9%, as of September, and a second quarter GDP estimate of about 4.6%, one might get the impression that our economy is in recovery. While there are some signs that things are improving, in reality there are mounting indicators that another housing downturn is near. And without solid proof that the housing sector is truly healthy – and until there is meaningful creation of well-paying, full-time jobs – the ‘recovery’ is illusory at best.

I think this will become quite clear in 2015 – and the number of people in the housing space who share my opinion is growing. Unfortunately, their opinions are rarely heard outside of their own sphere of influence. This is because many of the people on the front lines who see what is transpiring in their specific markets each day typically do not author articles or speak at industry forums about what they are experiencing. Among them are experienced listing agents who have specialized in marketing and disposition of distressed, bank-owned properties over the past two decades or more. These are local market experts who are in the trenches.

As a 21-year industry veteran – on both the client and vendor sides of the mortgage servicing business – I know and communicate with hundreds of top-producing real estate owned REO specialists throughout the U.S. I also serve as a moderator, panelist or featured speaker at numerous industry conferences and continue to author a plethora of articles on issues and trends affecting this space. My views most often reflect those of many of these front-line real estate professionals.

Chief among these views currently is the widely held belief that the economy in general and the housing sector in particular are weaker than we are being told by the media, special interest groups and others. Many of these professionals point to ‘real’ unemployment data (i.e. workforce participation rates) and lack of wage growth as primary indicators that another housing downturn is on the horizon – if not, at least, a continuation of the downturn we are currently experiencing.

A recent New York Times article written by Jared Bernstein, ‘How the Jobless Rate Underestimates the Economy's Problems,’ discusses the extent of slack in the economy, which is tied to the unemployment rate. In it, Bernstein proffers that there is considerable ‘slack’ with respect to underutilized resources (humans) in our labor market.

‘In addition, businesses, governments, employers and investors all need to know how the near-term economy is doing in order to plan for the future, including hiring, sales and budget outlays, and receipts,’ Bernstein writes.

The problem is basically this: There are nearly 8 million involuntary part-time workers who desire full-time positions, but aren't able to find them. The unemployment rate so often quoted in the mainstream media doesn't reflect this ‘slack.’

In addition, there is a large number of people who have literally dropped out of the labor force and have given up looking for work.

The truth is that the effective national unemployment rate today is really closer to 10% or even higher when you take the above factors into consideration.

It is no secret that numbers can be made to reflect whatever outcome an analyst, economist, politician or anyone else wants them to. At a high-profile mortgage industry conference I attended recently, a panel of economists all essentially admitted as much on stage in front of more than 500 attendees.

What follows are other, basic factors which tell me that the so-called housing ‘recovery’ remains largely an illusion:

  • There remains a significant ‘shadow inventory’ of properties that have been foreclosed on, but have not yet been released into the marketplace.
  • A ‘ghost inventory’ has also been created that is made up of loans (notes) that are sold in bulk to investors who are non-bank servicers and then resold. These loans are not reported, as required of banks, and are delayed hitting the market. This artificially drives up house prices, even though prices are declining in some markets.
  • Foreclosure backlogs remain very high in states that have judicial foreclosure processes.
  • The dramatic influx of institutional investors buying up pools of REO properties to turn them into rentals has also contributed to rising home prices. But now, some of these institutional investors are selling off some of their portfolios because their business model was flawed insofar as they didn't adequately take into consideration decreasing home values/prices and rising vacancy rates.
  • Fewer and fewer first-time buyers are entering the market due to more stringent mortgage lending guidelines. Without them, others cannot ‘move up.’
  • Affordability (or lack thereof) of homes has stalled the market, and in some markets, prices are dropping.
  • The proliferation of Federal Housing Administration loans has created a scenario where these low-interest loans have become the ‘new subprime’ loans.
  • The federal government is encouraging Wall Street to again create mortgage-backed securities.
  • Some lenders are lowering their FICO score requirements in order to accommodate underserved borrowers.
  • The federal government (notably the Consumer Financial Protection Bureau) is ‘encouraging’ lenders to make loans to low-income buyers… again.
  • Homeowners are once again using their ‘equity’ as a kind of ATM, as pointed out in a recent Wall Street Journal article by AnnaMaria Andriotis, ‘More Homeowners Are Tapping Their Home Equity.’

Most importantly, as stated earlier, many believe that there has been no real effort to create decent-paying, full-time jobs in America in recent years. Without them, the economy cannot grow and the housing industry will remain stagnant or worse.

In truth, there is little doubt that the oft-reported ‘trending’ of an improved housing market was artificially created, just as the recent Great Recession was protracted by government interference into an area best managed by the private sector – the American housing industry.

If the federal government would simply get out of the way, leaders in the private sector will resolve what ails our economy and the housing market in particular. And in so doing, they will create meaningful career positions that will lead us back to prosperity for the middle class, not just the ruling class.

Lynn Effinger is a veteran of the housing and mortgage servicing industries. He currently serves as executive vice president of field services company ZVN Properties Inc.

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