TheMReport — News and strategies for the evolving mortgage marketplace.
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Feature I n 2006, housing's peak year, before the onset of the Great Recession in December 2007, builders broke ground on an average of almost 1.5 million single-family homes per month. In the 12 months ended November 2012, housing starts fell by about two-thirds. Moreover, builders completed an average of 473,750 homes each month in 2012 compared with 1.66 million in 2006. The falloff in completions and in starts coincided with a surge in foreclosures, which, according to a study by William Hedberg and John Krainer of the Federal Reserve Bank of San Francisco, changed the dynamics of housing supply. "The residential construction sector enjoyed a sustained boom from the end of the 1990 recession to 2006, after which activity collapsed and then stayed at extremely low levels throughout the ensuing recession," they wrote. "Many of the traditional factors that enter into a housing supply function, such as price signals from the product market and changes in costs, simply cannot account for the large and sustained drop in construction activity." Instead, they said, "the foreclosure variable is necessary to account for the steep and sustained drop in new construction activity following the U.S. housing market bust beginning in 2006." At the end of 2012, according to data from RealtyTrac, an estimated 1.5 million homes were in foreclosure out of 74.1 million homes with mortgages. The inventory of new homes for sale, according to the Census Bureau, fell to 146,000 per month in 2012 from its peak of 553,000 in 2006. And according to data from the National Association of Realtors, which tracks existing-home sales inventory, the number of homes available for sale plummeted from 4.21 million per month to just 2.3 million per month in 2012. Employment Takes a Hit T he drop-off in building activity has had a dramatic impact on employment, with the number of residential construction jobs falling from a peak of just more than 1 million per month in 2006 to about 564,000 per month in 2012. The number of wholesale trade jobs in the construction sector—suppliers of lumber and other construction materials—dropped from 264,000 per month in the 2006 peak to 187,000 per month in 2012, about 813,000 jobs lost in total to the housing collapse, not to mention those involved with selling or financing homes. "The lack of construction workers has been one of the surprise stories of the housing market recovery and could well be a headwind that slows the recovery down a little bit," suggested Rick Sharga, EVP of Carrington Mortgage Holdings of Santa Ana, California. "There's also a question about how robust the supply chain for materials is, since much of the infrastructure was shuttered during the downturn. Once insurance issues have been sorted out, [Superstorm] Sandy will probably have a positive effect on homebuilding as homeowners rebuild and replace damaged homes. While this may divert some resources in the short term, it's likely that the industry will do whatever it takes to simultaneously handle that unexpected work and begin the process of building new homes in markets that are showing signs of growth after years of lying dormant." Housing-Related Oddities T he drop in construction and in inventory for sale has led to some peculiar situations. Stockton, California, for example, has, according to RealtyTrac, the highest U.S. foreclosure rate but also has a housing shortage. The number of homes for sale in the city fell 42 percent in October 2012 from a year earlier. Listings routinely attract multiple offers and, according to reports, prices are on the rise. The Stockton experience contradicted forecasts that homes would flood the U.S. market once lenders resolved foreclosure claims and worked through backlog, driving down prices for years to come. The deluge never happened even after the five biggest U.S. mortgage servicers reached a $25 billion settlement with federal and state regulators last February. Instead, the number of properties for sale shrank as the gradual healing of the housing market helped boost consumer confidence and the economy. Stockton is not unique, according to Ryan White, a San Diego real estate agent and real estate talk show host. "In San Diego and many other places, there are very few foreclosures hitting the marketplace, and we are seeing a surge in demand and prices," he said. "Some are concerned about shadow inventory, which would be foreclosures, but I don't really see any evidence that this is going to occur. Previously, when foreclosures peaked in 2008–2009, the market was flooded with foreclosures and the majority of transactions were foreclosures, so they drastically increased the supply and drove prices down for traditional sellers" According to the National Association of Realtors (NAR), the median price of an existing single-family home is down 21.6 percent from its July 2006 peak, but that was a recovery: In January 2012, the median price was down 32.9 percent from the peak. And, according to the latest Census Bureau data, the median price of a new single-family home is off 6.2 percent from its March 2007 peak, a recovery from November 2011 when it was off 18.4 percent. Lending Also Affected A cross the country, said Mike LaCava, president of Hold Em Realty in Southeastern Massachusetts, the impact of foreclosures on supply and transactions has changed bank lending. "We are noticing in Massachusetts that the banks are working hard to prevent the houses from becoming vacant, by either working out loan modifications or short sales with the defaulted homeowner. As investors, this has been very advantageous, as banks are far more willing to work with us in the case of distressed properties," he said. "This approach has helped stabilize the market in Massachusetts because there has not been an influx of distressed properties being listed. When there is an overabundance of inventory, that usually drives the market down, but what we are seeing in our area [is that] the market is stabilizing nicely and in The M Report | 31