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Slow, Steady Recovery Best for Housing

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The housing market is improving slowly but surely, but both external forces and internal paradigm shifts are keeping a lid on a more robust recovery.

And that’s probably a good thing, preventing the market from bubbling over again, despite protests from real estate agents and other — including Federal Reserve Chairman Ben Bernanke — that “overly tight lending standards may now be preventing creditworthy borrowers from buying homes, thereby slowing the revival in housing and impeding the economic recovery.”

But having the pendulum swung too far in the direction of tight lending standards is a much better problem to have than the pendulum swung too far in the direction of loose lending standards. And I would argue that lending is not overly tight as evidenced by average foreclosure rates on FHA-backed loans originated between 2008 and 2010 that are twice as high as overall foreclosure rates.

I’ll cover those problem FHA loans in more depth in a future post, but suffice it to say they were filling the gap left by a decimated subprime lending industry and come with the loosest lending standards available to most borrowers.

Housing Headwinds: External Forces
The external forces facing the nascent housing recovery are at least threefold, and I covered these in depth for a panel at the 35th Annual Real Estate & Economics Symposium sponsored by the Fisher Real Estate & Economics Symposium at the University of California at Berkeley last Monday in San Francisco.

The good news is that each of these external forces, which I refer to as dark clouds, are paired with a silver lining that provide hope for the housing market going forward. Although a significant amount of shadow inventory and latent distress exist in the housing market, foreclosure activity nationwide is hovering around five-year lows. Despite a sharp increase in distressed short sales, which continue to be a drag on home prices, full-fledged foreclosure sales — which have an even bigger negative impact — are down significantly. And while protracted foreclosure timelines in some states are resulting in rebounding foreclosure activity this year, that additional foreclosure inventory is being absorbed without much or any of a price decrease in many markets across the country.

Housing Headwinds: Internal Shifts
My fellow panelists addressed the internal shifts in the inner workings of the housing market that are keeping the recovery muted. Rich Paddock, president of Paddock Appraisal Service, Inc., in Modesto, Calif., addressed the aforementioned issue of overly tight lending standards, that often are tied to much more conservative appraisals.

Gary Beasley, managing director of Waypoint Homes, a company that focuses on purchasing single-family homes as rentals, addressed the issue of declining homeownership rates and the proclivity of many young families to rent rather than buy. That trend, which he expects to continue, gives his business long-term viability.

Related News
The Mortgage Credit Crunch that Isn’t
Foreclosure Activity Drops to 5-Year Low in September
Low Foreclosure Supply Pushes Sales Lower, Prices Higher


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