Housing Recovery on the Way

house for salePowered by the highest number of home sales in more than two years, the housing market appears to be on the road to recovery – at least to some consumers. First time buyers pushed to close purchases before the looming government deadline expired for an $8,000 tax credit.

Rock bottom priced triggered a flood of home sales in hard hit Cleveland, one of the nation’s worst hit and lowest priced markets. California and Florida markets are showing signs of budging. But there’s more to this fiasco than meets the eye.

On Monday the Obama administration will announce new plans to help homeowners at risk of foreclosure to stay in their homes.

The record housing downturn has been driven to a large extent by the epidemic of foreclosures, and the foreclosure epidemic is far from over. There your castle is your homeis evidence that bankers are more actively working with homeowners to modify mortgages and perform short sales, in which mortgage servicing companies cooperate to reduce the amount owed on a mortgage.

But there’s a whole lot more to the housing mess, which started on Wall Street. Growing unemployment, more foreclosures and restrictive lending standards are adding to the mess. The jumbo mortgage market barely exists these days without a way for lenders to sell-off mortgages in the secondary market.

single family houseReal estate is dependent on a whole range of things to run as a successful part of commerce and is tied to as much as 40% of the overall economy, including home retailers, banking, lumber and construction. Without a mortgage market that makes loans more available to middle class buyers without perfect credit a real recovery won’t materialize.

Without a banking sector that offers loans to the majority – and we’re talking the middle class here – the majority is eliminated from the market, and thus some argue eliminated from actively participating in society. This elimination would lead to a larger class of renters or people who don’t even care if they own a home because they don’t see the advantages of homeownership.

Sure, there’s the obvious homeowner tax credit, and pride of ownership issues. But if there isn’t enough in it for the “me” generation that we have in today’s society there won’t be a strong enough sense to be homeowners.

Over the years real estate ownership has changed. Before people wanted to own a home to feel more independent, carry pride in being homeowners and perhaps even have a place to live someday without paying a mortgage. Many people still have some of these values.

But when the real estate boom started to get out of hand and property values inflated at record rates views changed. Homeowners all over used their homes like piggy-banks and borrowed against them for boats, new cars they could otherwise not afford and all sorts of amenities.

Pool companies racked up record profits. Auto dealers saw all-cash transactions. Boat dealers had a hey-day. Check boat prices lately? The artificial boom got out of hand. People talked as though they were making fortunes on their homes even though most weren’t selling them and the cold hard cash never materialized.

Nonetheless, the boom made many first time speculators fortunes, but perhaps just as many people lost money as a result of the bubble.

Views have changed. People have chosen to pay on credit cards before mortgages and an increasing number are walking away from mortgages. More than 1 in 4 are upside down, owing more on their homes than they are worth. This mess isn’t going to get straightened out quickly.

The first time homebuyers tax credit has helped to boost home sales, but there’s a whole lot more that needs to be done to instill confidence in the system again to produce a full recovery. A full-fledged recovery will develop in time, but the cycle needs to run its course. Transparency in the banking system could be a good start.

Mike Colpitts is the editor of Housing Predictor and has been a real estate analyst 20 years.

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