The national outlook for home sales next year looks “very good,” though tight credit means housing will not see rapid growth anytime soon.
That’s according to Kenneth T. Rosen, chairman of the University of California, Berkeley, Fisher Center for Real Estate and Urban Economics, who spoke at the 35th Annual Real Estate & Economics Symposium hosted by the center Monday.
Interest rates at a 50-year low, job growth and low inventory mean that the housing market is recovering, Rosen said.
“It’s not a boom, but it’s recovering,” he said.
Rosen thinks the reason housing isn’t booming is because the government has responded to the economic downturn by trying to fight the wrong problem.
“The problem is not (that there is not) enough money, because the (Federal Reserve) has poured in a lot of money into the economy,” Rosen said. “We have too much money out there, not too little money. The problem is loan availability.”
Restrictive credit score requirements mean 40 percent of people can’t get a loan, he said.
According to Ellie Mae, a provider of software to mortgage originators, borrowers approved for conventional purchase loans in October had an average FICO score of 762. The average FICO score for purchase mortgages insured by the Federal Housing Administration was 700.
“I think the average FICO score should be back at 650,” Rosen said.
But he held little hope for improved credit availability in the near future.
“Credit is not going to get a lot looser. This administration is not pro-homeownership. They are not homeowner advocates, they are renter advocates” because their constituency is largely in urban areas, which typically have a high share of renters, Rosen said.
The FHA, whose mission is to provide homeownership opportunities for moderate-income families, particularly first-time buyers and minorities, is an exception, Rosen said.
“The FHA is doing a great job, but they’re the only ones there,” he said.
The FHA reported a $16.3 billion deficit last week, raising the specter that the agency will require a taxpayer bailout next year for the first time in its 78-year history.
Rosen said the shortfall was “not surprising,” given the FHA’s role in shoring up the housing market during the downturn. The agency expects $70 billion in future losses from loans made between 2007 and 2009.
“It’s a function of history and they’ll get through it,” Rosen said.
On the inventory front, underwater homeowners are likely to sell as prices rise next year, increasing the number of available homes for sale, said Daren Blomquist, vice president of foreclosure data aggregator RealtyTrac, who also spoke at the symposium.
But “I don’t see a flood of inventory; it’ll be slowly meted out as prices come up,” he said.
The role foreclosures will play will vary by state, Blomquist said.
In states where foreclosures are handled by the courts (judicial foreclosure states) foreclosures take considerably longer to process than in nonjudicial foreclosure states. For example, in New York, a judicial foreclosure state, it took an average of 1,072 days to process a foreclosure in the third quarter; in California, a nonjudicial foreclosure state, it took 335 days.
Though delayed, foreclosures are being processed in judicial foreclosure states such as Florida, Illinois, New York, New Jersey, Ohio and Pennsylvania, and each has seen increasing foreclosure activity in the last nine to 10 months, Blomquist said.
“That indicates more foreclosure sales next year,” he said.
But in nonjudicial foreclosure states like California, Arizona and Nevada, there’ll be less foreclosure inventory to add to for-sale inventory, he said.
“If Realtors are looking for shadow inventory in those states, it’s probably not very likely,” he said.
Clouds on the horizon
Overall, the U.S. economy has many positives going for it right now, though there are some clouds on the horizon that could affect the housing market next year.
“We have very strong job creation. Private sector job creation is very good, (though) a little slow in summer. Auto sales are quite strong. Home sales are coming back. We have very low interest rates. Corporate profits are very high and cash balances are high,” Rosen said.
Rosen said the so-called “fiscal cliff” — a series of tax increases and spending cuts that will go into effect at the beginning of next year unless U.S. lawmakers come up with an alternative plan to reduce the federal deficit — remains a concern. At the moment, he said, a grand bargain seems to be more likely than congressional gridlock.
Regardless, he said, the U.S. economy could face headwinds including instability, a slowdown in overseas growth, and tax increases at home.
Rosen estimates there’s a 30 percent chance the U.S. economy will double-dip back into recession if any one of three events occur: we fall off the fiscal cliff, the euro collapses, or the supply of oil from the Middle East is disrupted.
Should we go over the fiscal cliff, taxes will rise for all taxpayers. These include a jump in capital gains taxes; tax rate increases in the top four brackets to 39.6 percent (from 35 percent), 36 percent (from 33 percent), 31 percent (from 28 percent), or 28 percent (from 25 percent); and 28 million more taxpayers will be subject to the alternative minimum tax (see “What happens to your taxes if we go over the fiscal cliff.)”
New Medicare taxes will kick in next year regardless for for high-income taxpayers under the Patient Protection and Affordable Care Act (“Obamacare”). Married couples with adjusted gross incomes over $250,000, and singles with AGIs over $200,000, will face a 0.9 percent increase in the current Medicare tax and a 3.8 percent tax on investment income. All taxpayers who itemize will also face more restrictive limits on deductions for medical expenses.
A payroll tax holiday that has reduced workers’ share of Social Security taxes from 6.2 percent to 4.2 percent for the last two years is set to expire at the end of 2012. Reuters reports support for an extension of the tax holiday is growing in Congress, particularly among Democrats. The tax break has provided workers with an average of about $1,000 a year in extra cash, Reuters said.
At the state level, in California, the newly passed Proposition 30 will raise the sales tax for everyone, from 7.25 percent to 7.5 percent, and also raise income taxes for those earning more than $250,000 a year.
A deal to avoid the fiscal cliff could include limits on the mortgage interest tax deduction. Also, if the Mortgage Debt Relief Act is allowed to expire, mortgage debt forgiven in a short sale, loan modification or foreclosure could be considered taxable income next year.
“We don’t know what’s going to happen, but we do know taxes will be higher,” Rosen said. “A lot higher or a little higher we don’t know.”
“It will hurt the housing market because there will be less money in the system,” he said. How much it hurts depends on the tax increases themselves, which are as yet uncertain, he said.
On a global scale, the eurozone sovereign debt crisis and recession as well as economic slowdowns in the BRIC countries (Brazil, Russia, India and China) could blunt U.S. exports and increase the trade deficit, which fell to its lowest level in nearly two years in September.
Rosen predicted the euro would not last due to a lack of homogeneity among European countries.
“One currency requires an integration level that I don’t think is going to happen,” Rosen said. “So, I think within several years we’ll will have shadow currencies and country after country will say they don’t need one currency.”
That doesn’t mean other eurozone policies, such as open borders, can’t remain in place, he said.
As far as oil prices, Rosen noted oil and gas booms in states like North Dakota and Ohio, but said the technologies that are creating those booms, namely hydraulic fracturing (“fracking”), would be exported to other countries, who would then have their own energy booms.
The result may be a $10 or $20 drop in the per barrel price of oil, though it may only be a 10-year phenomenon as supplies run out, Rosen said. Alternative energy is a better bet for the long term, he said.
For now, oil prices are still very high, he said, and “if the Middle East blows up, we could see $150 a barrel overnight,” he said.