Get Ready for a Weak Recovery

Some markets are stabilizing now and on the macro level, the housing recovery is not far away, according to Sam Khater, senior economist at CoreLogic. But the long awaited recovery won't be much to get excited about, at least initially.

Negative equity is the culprit and it will continue to dampen demand and prices for months to come. Like other sectors of the economy, housing has excess capacity that must he absorbed before demand pushes prices upward. Khater says it may take many months, if not years, for a robust housing economy to return.

In an interview with Real Estate Economy Watch, Khater said that the stimulating economic effects of last year's tax credit and the Administration's HAMP program to modify delinquent mortgages are virtually past and now the organic market forces driving housing markets have taken prices close to the bottom, as measured by fundamentals like purchase vs. rent or price vs. income comparisons.

In January CoreLogic forecast that prices nationally would fall an additional 5 to 10 percent more before reaching bottom this year. Last week, the research firm reported prices had fallen 6.5 percent in February on a year-over-year basis.

"Falling prices tend to overshoot fundamentals, so we're not quite there yet," Khrater said. "But when we get there, expect a weak recovery for some time."

Through the fourth quarter of 2010, CoreLogic reported 11.1 million homeowners, representing about 23.1 percent of all residential properties with a mortgage, owed more on their mortgages than their properties were worth. About 10 percent of borrowers have more than 25 percent negative equity. With prices forecast to fall 5 to 10 percent during the year, CoreLogic forecast that the most negative equity will rise is another 10 percentage points.

Until prices appreciate sufficiently to markedly improve values and move homeowners above water, negative equity will continue to freeze millions of owners in place and make them vulnerable to foreclosure.

Currently CoreLogic is seeing the discount between distressed and not distressed sales growing and the distressed marketshare has risen to 34.5 percent from a low of 24.1 percent last June, at the end of the tax credit boomlet. The failure of HAMP to reduce the supply of foreclosures has contributed to supply, and state moratoria and the robosigning scandal created a national backlog and delayed thousands of foreclosures from reaching the market until now.

Khrater said that the delays are causing properties to be vacant for longer periods of time, which may be making them difficult to sell. Banks may be setting prices lower to move aging properties and giving additional discounts to investors paying cash.

Yet on a weekly basis, CoreLogic is seeing prices among non-distressed properties improve.

Learn more about CoreLogic.

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