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feature ANALYTICS Or ig i nat ion The Real Deal: s e r v ic i ng Lending's LongTerm Outlook Will the mortgage and housing industries stay on track for recovery, and how is the marketplace preparing for what's now and what's next? The housing industry's rapid rebound took many experts by surprise—even the researchers who authored the report admit they "have been slightly taken aback" by the recovery's speed. However, they point to several major indicators that show the current upturn is more than a temporary blip or a false recovery. Sustained rises in demand, home prices, homebuilding activity, and new and existinghome sales all demonstrate that the market is seeing a lasting recovery, they say. They also forecast further price growth of 5 percent in each of 2013 and 2014. What's more, even as prices rise, valuation and affordability— "the cornerstone on which the improvement in housing is being built"—remain very favorable. The major threats to the market at this juncture, the analysts say, are the potential for a new American recession (brought on by complications from the fiscal cliff and the potential of a partial eurozone breakup) and the risk that properties in the shadow inventory will flood the market and drive prices down. As far as the economy is concerned, Capital Economics' working assumption is that Washington will avoid throwing the country into another downturn. Beyond that, the firm notes that trade links between the United States and Europe are relatively small, and the financial links aren't significant enough to tip the country back into recession should the eurozone see problems. Turning to the shadow inventory, analysts estimate zthe backlog of homes at risk of coming onto the market may be as large as 3.8 million (1.5 times the number of properties actually for sale). If those homes were allowed on the market too rapidly, supply would balloon and disrupt the price recovery—but they don't expect that to happen. "The signing of the $25 billion foreclosure settlement has not led to a wave of foreclosures hitting the market," the economists write. "With foreclosure timelines still protracted, and banks wary of the effects that a glut of supply would have on the recovery, we anticipate a continued trickle of homes from the shadow inventory, rather than a flood." Of bigger concern is the recovery's dependence on investors and cash buyers. According to Capital Economics, "Mortgagedependent buyers have made next to no contribution to the improvement in housing market demand," mostly because of tight credit. Instead, it's been buyers and investors—who are less dependent on mortgage finance— who have driven much of the recovery so far. The problem, though, is that investment buying won't last as discounts start fading. According to data from Zillow, the availability of deeply discounted foreclosures has been dropping sharply in states most targeted by investment buyers. While the trickle of properties from the shadow inventory will keep some bargains on the market, cheap, high-yielding homes are disappearing. The M Report | 63 se c on da r y m a r k e t D espite a number of potentially damaging headwinds, ongoing improvements for U.S. housing will remain sustainable for the foreseeable future—at least according to economists at Capital Economics, who are calling the nation's recovery the "real deal." Tracking market activity and making projections for the market's next 24 months, the firm's recent report indicated that the mortgage and real estate industries will establish a solid, if slow, pattern of expansion. a na ly t ic s By Tory Barringer and Abby Gregory