Housing is recovering, still threatened

The housing market is poised for a strong performance this year, unless strong economic headwinds stymie its progress.

Continued high levels of unemployment, partisan bickering in Washington over spending and broader fiscal policies, new mortgage rules along with bad appraisals and a tight lending environment could hamper the recovery that rooted last year, economists argue.

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Nearly six years after the housing crash, the sector was bolstered by steady job gains, record-low mortgage rates and the release of pent-up demand for housing, pushing up the market's contribution to economic growth.

Still, the sector is fragile and any shocks could not only hurt housing but ding up the economy, which is trying to gain more traction nearly three years after the recession ended.

"Nearly every measure of housing market strength — sales, starts, prices, permits and builder confidence — has been trending upward in recent months and we expect to see gradual but steady growth along these lines in 2013," David Crowe, chief economist of the National Association of Home Builders (NAHB) said this week.

But "continuing gridlock in Washington over how much more fiscal tightening is needed to stabilize the debt-to-GDP ratio, along with calls by some policymakers for major changes to the mortgage interest deduction, threaten to negatively impact consumer confidence and future housing demand," Crowe said.

Although lawmakers mostly avoided going over the fiscal cliff, they left plenty undecided for 2013, billions in automatic spending cuts, funding the government through the end of the fiscal year and raising the debt ceiling, which is expected to be put off until this summer.

As part of the legislation passed by the House to delay the debt ceiling until May 19, lawmakers must produce yearly budgets in each chamber or face the loss of their pay, a move that could, at least, provide certainty over that long-put-off process.

The House approved a budget last year but the Senate hasn't produced a non-binding blueprint for the nation's spending since 2009.

Mark Zandi, chief economist with Moody's Analytics, said there are three key potential impediments to a housing recovery, including a still tepid job market, tight mortgage credit standards and a large number of homes wallowing near or in the foreclosure process.

"There is a bit of chicken and egg problem between the housing and job markets," he told The Hill.

"I’m hopeful that more homebuilding, home sales and higher house prices will jump start more job growth which in turn will further propel the housing market. A virtuous cycle takes hold after many years of a vicious cycle," Zandi said.

There are nearly 3 million first mortgage loans — out of 49 million — hovering near foreclosure and that number needs to drop below 1 million to reflect a healthier mortgage market.

"This overhang of foreclosed property should dwindle as the year progresses, and investor demand for distressed property remains strong, but as long as so many loans are in so much trouble it is hard to be fully confident that housing is off and running," Zandi said.

Getting a loan is still tough for potential borrowers with high underwriting standards and appraisals coming in low based on the price declines of the past.

"As mortgage quality improves and the legal and regulatory uncertainty abates, I expect lenders to ease up and mortgage credit to become more available," Zandi said.

"It is important for regulators to nail down rules like QRM [Qualified Residential Mortgage] and the Basel III capital standards to give lenders more confidence to lend with more gusto."

Anthony Sanders, a real estate finance professor at George Mason University, agreed that while the nation's "fiscal health and looming budget cuts" are weighing negatively on the housing market, the new mortgage rules recently announced by the Consumer Financial Protection Bureau (CFPB) "are truly endangering a recovery" because they are so restrictive.

The final rules on the QRM, which are expected later this year, could further restrict mortgage lending, David Berson, senior vice president and chief economist at Nationwide Insurance said this week at a housing conference.

Generally, though, most banking and financial groups have praised the CFPB for producing rules that will better protect them along with their customers following the 2008 financial crisis and housing crash that wrecked the economy.

But there is still concern that the new rules could curb competition, increase costs and tighten credit availability for borrowers.

While Berson echoed some of the concerns about Washington's ability to come to agreement on major fiscal issues, he said that it is "still too soon to completely rule out the chance that a policy stalemate will lead to an economic downturn."

He is optimistic that President Obama and congressional Republicans will reach agreements over the trio of major policy issues they face during the first six months of the year.

A positive result could put housing as a leader of the economic recovery this year, Berson said.

Despite the hurdles, the housing recovery trudges onward.

Over the past five quarters, housing's contribution to the economy has gradually increased, up to 12.8 percent in the fourth quarter of 2012.

The NAHB is forecasting 949,000 total housing starts in 2013, up 21.5 percent from 781,000 units last year.

In December, construction starts hit their highest level since June 2008 and were up 28 percent compared with 2011.

Weighing construction starts, existing home sales and the delinquency-plus-foreclosure rate, a housing recovery gauge this week showed that the market is 52 percent of the way back to normal, up from 41 percent in September, according to Trulia’s Housing Barometer.

In addition, housing prices increased 4 percent between September 2011 and September 2012, with prices increases seen in 42 states, according to the Freddie Mac.

Home price appreciation only occurred in a handful of states during 2010-2011.

Meanwhile, new home sales had their best year since 2009, making their first gain since 2005 after coming off their worst year since records were kept in 1963.

For the year, sales were up 19.9 percent 20 percent to 367,000, still below the 700,000 level that economists consider healthy, the Commerce Department reported on Friday.

Sales are expected to increase to 575,000 in 2013, according to the National Association of Realtors (NAR).

Existing-home sales are forecast to rise 8.7 percent increase to 5.05 million in 2013, up from the 4.65 million last year, with 5.3 million expected in 2014, according to the NAR.