Housing Recovery: A Long, Slow Road To Normal?



Real estate consultant Jonathan Miller calls it all "happy housing" — reports and commentary that, in his opinion, overemphasize the positive.

Forecasts see U.S. home price gains of at least a couple percentage points this year, given early signs pointing to a housing recovery. But there's rising debate among real estate analysts on whether some recovery calls are getting overheated.

Miller, president of influential New York-based real estate appraisal and consulting firm Miller Samuel, is especially skeptical of rosy forecasts based on recently rising prices. He cautions that the housing recovery could move sideways or down for the next couple of years as foreclosures move through the system and tough underwriting persists.

"That is not being factored into happy housing news," Miller said.

The National Association of Realtors forecasts U.S. existing-home sales to rise about 9% this year and the median price to lift 5%, on the heels of a 9.5% year-over-year price jump in August. A rise in the median, or midpoint, can reflect either appreciation or a change in the mix of sales toward higher-priced properties and away from foreclosures.

Everyone's Got An Opinion A recent poll by real estate website Zillow (NASDAQ:Z) found consensus expectations for a 2.3% U.S. home price rise in 2012. But views among the 113 economists and other real estate strategists it surveyed ran a gamut — from depreciation of 2.5% to appreciation of 9.2%. Just a quarter ago, those polled expected on average a 0.4% drop for the year.

In a big rise from the flat 2012 view two quarters back, the Urban Land Institute's September survey of 39 real estate economists and analysts came up with consensus expectations of a 3.2% rise in average home prices this year, followed by 3.9% in 2013 and 5% in 2014.

What could mar that scenario? Though foreclosures have fallen, Miller sees plenty of "unfinished business" with foreclosures ahead. It could cause U.S. home prices to weaken at times over the next year or two, as bank-owned homes typically sell at a 30% discount and drag on the prices of nearby homes.

Also, tougher mortgage underwriting is keeping plenty of would-be buyers from sealing deals, even as interest rates keep falling.

"If you can't get a mortgage, how does that help you?" Miller said.

Homebuyers' overinflated views about where home prices would go helped fan the housing bubble. And it could take a long time to achieve those valuations again.

Calculating by the S&P Case-Shiller Home Price Index, economist David Blitzer figures it could take perhaps 12 years for home prices nationwide to recover their 30% loss from the peak in 2006.

He points to a more normal period from 1987 to 2000 when the annual rise across 10 big cities in the home price index was 3.6% — or just 0.3% when adjusted for the annual inflation rate of 3.3%.

"At 3.6% per year it would take about 7-1/2 years to recover that 30%," said Blitzer, chairman of the S&P Index Committee. "However, inflation today is about 2%, not 3.3%. So we should probably correct the 3.6% rate to 2.3%, in which case a bit less than 12 years (are) needed to increase by 30%.

How much of a handle do homebuyers have on the market? Ten-year home price appreciation expectations reached abnormal levels at the peak but have declined sharply since, according to a study by economists Karl Case, Robert Shiller and Anne Thompson, presented recently at a Brookings Institution conference.

And though short-term expectations of price trends turned positive this year, house hunters' long-term views are weakening, the authors reported in the study, called "What Have They Been Thinking? Home Buyer Behavior in Hot and Cold Markets.

It concluded that while a recovery may be plausible in view of rising prices of late, "we do not see any unambiguous indication in our data of a sharp upward turning point in demand for housing that some observers, and media accounts, have suggested.

Aiming for 'Normal' Blitzer says the housing market seems to be returning to "normal," which isn't necessarily a bad thing.

"Location is a key factor in housing," he said. "From 2005 to 2007, everything went up together and everything went down together. That was strange.

Views are that some markets, such as Sun Belt draws Phoenix and Miami, could continue to see higher price appreciation — albeit up from crushing falls in the bubble years.

"We see normal things coming back with a couple of good spots, a couple of bad spots. It's not going to be 2006 all over again," Blitzer said.

Risks to a recovery remain, such as high unemployment, negative equity, foreclosures and a still shaky economy, says Zillow Senior Economist Svenja Gudell.

"Some regions haven't even seen a bottom yet," Gudell said.

There's also the wild card of how this year's presidential election could affect housing policy, and the economy, down the road.

Looking back at home prices over the last 100 years, normal price appreciation is less than 1% a year, inflation-adjusted, says IHS Global Insight economist Patrick Newport.

"We think prices hit bottom between mid-2011 and early 2012. We just don't think they will rise that much," he said.

IHS expects prices to rise about 1% a year, adjusted for inflation, over the next 10 years, Newport says. Home construction starts should return to more normalized rates in 2015 or 2016, he adds.

How Housing Stands Builders are stepping up starts this year, but the number of new homes is still far below normal. The median new-home price rose 11% in August from July, but new-home sales are a small part of the market.

Price bubbles are caused by "mob behavior," Newport said, noting that some sort of real estate bubble happens every other generation.

"Our collective memory isn't very long. In 20 or 30 years, people will forget what happened and make the same mistakes.

However, he says the recent housing crisis was the first time since the 1920s when big price swings went both ways, up and down.

The Federal Reserve's senior loan officer survey, Miller notes, shows all forms of credit easing but residential real estate. On top of that, one in four homeowners owe more than their house is worth, so they can't sell if they want to without a big hit.

"Another universe" of mortgage borrowers have low home equity, Miller adds. He says they aren't likely to trade up to a larger home anytime soon because they need a bigger down payment than before.

"People forget that sellers become either buyers or renters. If buying is a challenge and rents are rising, you're going to stay put," he said.

Tight inventory has been a key factor in pushing prices up in many markets in recent months.

Some forecasters, such as IHS Global, bake more-tempered growth into their outlooks for next year and beyond. CoreLogic (CLGX) too looks at next year differently, following the 5% growth in home prices it expects this year, not accounting for inflation. That's amid the short-term factors of tighter inventory and a drop in foreclosure sales.

"We expect both to stop improving," said CoreLogic economist Sam Khater. "They'll move from a positive force this year to neutral in 2013, meaning they will not provide an additional boost to home prices.

He says then, prices are apt to rise at about the same rate as inflation.