Will Real Estate Get Spring in Its Step?

The second quarter will be crucial -- but it faces some tough going

   
Will Real Estate Get Spring in Its Step?

Ah, spring. Flowers, baseball — and the prime real estate season, in which eager, young first-time buyers go in search of their dream home. But will second-quarter 2012′s housing market bring us a garden of blooms or a handful of ugly weeds? Let’s take a closer look.

As Q2 gets underway, real estate has some real positives going for it, and also some tremendous obstacles to overcome. On the plus side, we continue to have near-historic lows on mortgage interest rates, and home prices that are anywhere from 35% to 60% below the inflated levels of 2006. It’s still very much a buyer’s market, with inventories pumped up by an ongoing barrage of foreclosures and short sales.

However, several negatives are holding back the market.

Lending standards are still very tight, with extremely cautious underwriting guidelines on loan applications. Credit score and debt-to-income ratio standards have increased, and a slew of new federal regulations now limit what were formerly slam-dunk loan approvals.

In February, a nationwide survey of 3,000 Realtors found nearly one-third reported experiencing recent contract cancellations, up from a mere 9% in February 2011. Another 18% reported delays in scheduled closings.

The biggest hindrance to closings continues to be appraisals coming in below the sales price. Sellers cannot pay off their mortgage if they lower their price, and buyers are unwilling or don’t have extra cash to put down. So the deals fall apart.

Another problem is a new trend among lenders to mandate that certain repairs be made to distressed homes prior to closing. In the past, lenders were willing to overlook needed repairs because they understood that distressed properties often need work and that the new buyer would remedy the faults.

These new expectations create a bad choice for both buyer and seller because neither wants to make repairs on a house that isn’t guaranteed to close for one reason or another.

No Help From Washington

Also, despite all the ballyhoo about helping homeowners, behind closed doors the government has been doing just the opposite. The Federal Housing Authority (FHA), which accounts for a high percentage of the loan market in 2012, has now raised the fees on its Mortgage Insurance Premiums (MIP) for the second time in the last year.

This drastically reduces the loan amount for which borrowers will qualify. For example, on a $200,000 loan, a borrower who would have paid $91 per month in MIP fees a year ago must now pay $208. Depending on the person’s debt-to-income ratio, that might reduce the amount of money for a house by $20,000 or more.

In addition, the FHA, Fannie Mae, and Freddie Mac continue to add new rules and regulations onto the borrowing process, making it more difficult for people to get loan approval. For example, the FHA has a new policy that any unpaid loan collections over $1,000 must be paid off prior to closing. Some buyers lack the funds to do that.

Then there’s the job market, which continues to slosh along without the kinds of numbers that are necessary to propel the real estate market forward. According to Jobenomics.com, only 3.4 million new jobs have been created since January 2010, 46% less than what’s needed for growth vs. the traditional benchmark of 250,000 new jobs per month.

Apartments That Have It All

Attitudes among the young are also a hindrance: The perception that home ownership isn’t particularly beneficial continues to exist among those from 24 to 35 years old. Many have no sense of history beyond the bubble and crash, and fear that the home they buy today will be worth less in five years. Others have seen the negative headlines about millions losing their homes to foreclosure, and wonder if it will happen to them.

Moreover, many of the newer apartment and condominium complexes now purposely cater to the posh lifestyle fantasies of these young renters, providing them with in-ground pools, fitness centers, clubhouses, tennis courts and walking paths.

These young people aren’t overly anxious to trade such amenities for what was their parents’ American dream. Given the choice between apartments with it all versus having to mow the lawn, this group is choosing to rent, even if that means paying someone else’s mortgage rather than their own.

Groups like the National Association of Realtors (NAR), as well as the Obama administration, have been saying housing is really improving. Both have their axes to grind. However, the recent statistics really don’t concur. Last week’s new-home sales report was negative, falling 1.6% in February, confounding the analysts’ expectations for improvement.

I ran the March data in my own area’s Multiple Listing Service (MLS) this morning, and found that the closed sales were more than 5% lower so far for 2012 than for the same period of 2011. Although numbers will vary across the U.S., I often find that my city is close to the nationwide figures.

Long and Slow Recovery

Add it all up, and the second quarter may not hold much improvement from the first. As I mentioned in a recent article, I expect a long and slow bottom in the housing market, with an L-shaped recovery over several years.

Even with the recent pullback among homebuilder stocks, I would not yet be a buyer. As more shadow inventory is released over the next year, it will continue to hamper the sales of home construction companies.

Instead, with rental demand still great, I would urge investors to look for value from some of the apartment-related REIT stocks and ETFs, such as Mid America Apartment Communities (NYSE:MAA), or IShares FTSE NAREIT Residential (NYSE:REZ). Mid America’s dividend is almost 4%, and you can boost that dividend by writing covered calls on 100 shares or more of the stock.

This is a critical time period for real estate. In the coming months, investors should continue to monitor the data for closed sales (not pending sales), as well as new-home starts, and the Case-Shiller index of home prices. They’ll provide the direction for tracking where the housing market is going.


Article printed from InvestorPlace Media, http://investorplace.com/2012/04/will-real-estate-get-spring-in-its-step/.

©2014 InvestorPlace Media, LLC

Comments are currently unavailable. Please check back soon.