Housing Bottom Spells Relief, Not Recovery

by 23 Sep 2012

(TheNicheReport) -- Homeowners, real estate investors and professionals whose careers revolve around the health of the American housing market have found a few reasons to be optimistic in 2012. Foreclosure activity has been somewhat contained by the landmark National Mortgage Foreclosure Settlement Agreement signed a few months ago, major lenders are reaching out to many borrowers and trying to write down principal amounts on their home loans, and home prices have enjoyed steady monthly gains since the beginning of the year. 

The appreciation of home prices this year has been hailed as the true bottom of the housing crisis, and to the most hopeful analysts it means that a true recovery is just around the corner. There are, however, a few factors that stand out amidst the rising home prices. According to the Progressive Policy Institute (PPI), a think-tank known for its role as an idea incubator for the Bill Clinton administration, there are four underlying aspects of the current accrual of home prices that should be approached with caution:

Investor Participation

Real estate investors, speculators and opportunists have played a major role in drawing out a housing bottom. Participation by investors has accounted for about a quarter of all real estate transactions, something that the PPI sees as unsustainable. The problem with heavy investor participation is that it often leads to bubble-behavior when prices reach a certain level and too many exit strategies are implemented at once.

A Lack of First-Time Home Buyers

A healthy housing market should account for a 40 percent participation of first-time home buyers. Data compiled by the Mortgage Bankers Association indicates that the rate of refinances among all mortgage applications is now at around 80 percent. The low levels of purchase applications are being exacerbated by a shortage of first-time home buyers. In fact, investors are attracted to regional markets where families are attracted to rental households because they don't qualify to buy their first home. 

Homeowners Driven Out of the Market

First-time home buyers are not the only casualties of the housing crisis. Strict lending and credit guidelines, coupled with foreclosures and short sales are penalizing homeowners who end up dropping out of the housing market altogether. These former homeowners are likely to enter rental agreements instead.

Politics and Policy 

The foreclosure rescue and prevention initiatives put into place by the federal government have fallen short of their desired goals. The provisions of the Dodd-Frank act are still being ironed out and implemented, and entities like Fannie Mae and Freddie Mac are still far from shaking off their federal conservatorship. This creates a level of uncertainty that could put a hamper to the rising home prices in the future. 



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