12 Housing Themes for 2012

As 2012 rumbles out of the gate, the US housing market correction enters its sixth year. By all accounts, it’s been the worst real estate slump in generations. But even this far into the cycle, housing bears continue to troll through data releases looking for ominous warnings that vindicate their view that homebuyers and investors alike should shun real estate. They have a point, but record foreclosures, bloated inventory and home price declines are anything but news.

They are also missing the point entirely: The time to be bearish on housing was in 2005, not 2012.

For those not in the market, who get their color from the blogosphere and headline-selling financial press, the housing market is a mess: Foreclosures persist, unemployment is high, Europe is in turmoil, growth in China and the other BRICs is slowing and banks are doing their best to avoid giving out loans. And that’s all true.

But come December when we look back at how the housing market fared in 2012, this will not be a year remembered for how bad it was, but for how bad it wasn’t. Over the course of the six year housing correction, immense amounts of risk have been bled out of the market to a point where, in general, opportunities for good investments outweigh the risk of further losses.

Below are 12 themes for housing in 2012, and while not all represent rosy optimism, they support my continued view that housing bears are seven years late to the party. And while bulls may be early, the good ones always are.

1. Bottom Calling
All of a sudden its cool again to call the bottom in the housing market. Already, some prominent pundits and analysts have said 2012 will mark housing’s nadir. Goldman Sachs came out with a report in December predicting that the widely-watched Case Shiller Home Price Index would slip in 2012 but find a bottom. Optimism that Goldman’s forecast will come true should be tempered, however, since real estate website Zillow — a company built primarily on providing consumers misleading information about their home’s value — recently published a report of their own pointing to 2012 as housing’s low point. And remember, in 2009, 2010 was supposed to be the bottom. Then it was 2011. Midway through this year, if housing remains weak, look for those bold analysts to backpedal, finding unforeseen circumstances that rendered their predictions null.

2. Robo-signing hangover, cured?
This time last year, the housing market was holding its collective breath as the robo-signing scandal broke, revealing shoddy foreclosure processes, first at Ally Bank (formerly GMAC), then Bank of America, JP Morgan Chase and nearly all the country’s biggest lenders. The repossession machine ground to a halt, resulting in limited supply of new foreclosures coming to market. Banks scrambled to “investigate” their procedures, uncovering a litany of practices that were sloppy at best, illegal at worst. Even firms like Lender Processing Services, which provides back office support and services to the mortgage industry, got wrapped up in the scandal. As a result, foreclosures virtually ground to a halt in 2011, which helped prop up prices up in the first half of the year. In many areas, price declines accelerated into year-end as banks resolved their robo-signing issues again and restarted the foreclosure machine. 2012 looks to be another year heavy in foreclosures, but with hoards of cash buyers looking for distressed properties, it will take a true deluge of inventory to overwhelm pent up investor demand.

3. Geopolitical Uncertainty
The world is a mess. The list of geopolitical tinderboxes that could catch flame at any moment is too long to reprint here. Suffice to say, every asset class on investors’ menus is laced with risk, many of which have little to do with the fundamentals of the investment itself. And with risk at all-time highs and returns on savings at all-time lows, steady, cash flowing assets are starting to be seen as more attractive than they are boring. This flight to quality is one of the reasons cities like San Francisco, New York, Boston and Washington have seen investors flock to their Class A properties. A world where demand dries up in midtown Manhattan or downtown San Francisco is an ugly world indeed, and many view real estate a safe “as long as the world doesn’t completely implode I will be OK” bet.

4. Foreclosure Rental Program
The latest in a string of Washington-directed solutions to the housing market’s woes is the turning of millions of foreclosed homes into rentals. The Federal Housing Finance Agency, which oversees Fannie Mae and Freddie Mac, received over 4000 proposals after requesting ideas on how to structure its program to rent foreclosed homes. All the big players tossed their hats into the ring, in additional to financial firms like Fortress Investment Group, Deutsche Bank and Barclays Capital. With rents rising and home prices falling, regulators and politicians alike think they may have found a way to not only keep bank owned homes from pushing home prices down any further, but earn a couple bucks in rental income in the process. And while major lending institutions are playing ball to show they don’t relish in kicking Americans out of their homes, the logistical challenges to managing nationwide rental programs are, in a word, significant. Time, and data on actual REO homes turned into rentals will prove out just how successful the initiative ultimately is, and how much of it is political fluff.

5. Return of alternative lending
So-called “exotic” lending during the boom was one of the chief culprits in the housing market’s eventual collapse. But to think that alternative lending has no place in the market is plain ignorant. Through Fannie Mae, Freddie Mac and the Federal Housing Administration (FHA), government-backed mortgages – and their strict guidelines – dominate the current market for home loans. But increasingly, small originators are gaining market share by offering more flexible loan products. No one will call the loans “Alt-A” or “Subprime,” but that’s exactly what they are. But from the guidelines my firm has has seen, underwriting is far more reasonable and responsible than it was during the boom. Good borrowers with dinged credit or alternative income situations have been locked out of the mortgage market since the crash – bringing them back in will be a positive headwind for housing in the coming years.

6. Multi-family momentum
The hottest sector in real estate right now is multifamily. It seems like everyone wants to buy apartment buildings, in particular in coastal metro markets where rents are going through the roof. Cap rates have compressed to levels not seen since the market’s peak, interest rates are low (although loans are still a challenge to get funded) and money is pouring into the market. In Class A markets like San Francisco and New York, competition is heated for big buildings. But with smaller investors still reeling from the downturn, the small building market (5-20 units) is still awash with opportunities. Strong demographic trends (more below) that favor the rental market lead us to believe that apartments are hot for good reason, and should stay that way for the foreseeable future.

7. Foreign Investors
An often overlooked reason why housing is unlikely to fall off another cliff any time soon is the extent to which investor demand for distressed assets dwarfs supply. This is true for rundown duplexes in Oakland and Manhattan high rises alike. And within that world of buyers stalking the market for deals, a surprisingly large percentage of all cash buyers have names most Americans would have trouble pronouncing. To wit, in the past six months, 19 of the 20 cheapest homes in San Francisco were purchased by buyers of Asian descent. The money keeps pouring in, be it from wealthy foreign businesspeople looking favorable the tax treatment our government gives direct investment, speculators yanking money out of the rapidly cooling Chinese market or Canadian “snowbirds” picking up a desert spread on the cheap in an exclusive Scottsdale development. Our housing market is far from fixed, but when investors look around the world at their asset class options, the US real estate market is benefiting from being best in show at a really, really lousy show.

8. Hazy Future for Fannie and Freddie
Remember Fannie Mae and Freddie Mac? Those little government-sponsored entities no one outside the arcane world of mortgage finance had heard of until they blew up sky-high in September 2008? Since that time, the two companies have needed nearly $200 billion in capital to make up for losses on mortgages bought or insured before the market collapsed. Since Fannie and Freddie were put into federal conservatorship, regulators, market participants and lobbyists have squared off over how to reshape the federal government’s role in housing. Most experts agree that the housing market cannot become truly healed until there is resolution on this issue, and with 2012 being an election year, few expect meaningful progress on this complex, hotly debated issue. (For more on the history of government involvement in the housing market and how the real estate lobby shaped federal policy to support homeownership at all cost, check out my recently published e-book: “Homeownership at Any Cost: How the National Association of Realtors Convinced Taxpayers to Subsidize the American Dream.”)

9. False Election promises of a Silver Bullet
Notably, housing was absent from even the most economically-focused Republican primary debates. Unfortunately, politicians have little to gain by proposing bold steps to fix the housing market, primarily because no such bold step exists. Some programs have been more successful than others, and certain ideas to improve the market have more merit than others, but “solutions” that tap into federal funds are attacked from the right while those that aim to remove barriers to foreclosure receive equal scorn from the left. Trying to fix the housing market at this point is a bit like happening upon a beached whale, long since dead and starting to reek, and pulling out a garden house.

10. FHA Shortfalls
Google “FHA is running out of money” and the first articles that pop up are from 2009, when concerns first surfaced that the Federal Housing Administration, or FHA, was running short of cash. Unlike Fannie and Freddie, who purchase actual mortgages, the FHA provides mortgage insurers that protect lenders in the event borrowers stop making payments. FHA loan guidelines are strict in many ways, but loose on credit and allow tiny down payments in order to provide finding options for low-income or credit-impaired home buyers. FHA squashed rumors of financial troubles in 2009, but concerns were raised again late last year when an independent auditor found that there was close to a 50% chance the FHA would run out of money and require a federal bailout. If FHA is indeed forced to go hat in hand to Washington for cash, the chances of such a request being well-received are, to say the least, somewhere squarely between slim and none.

11. Private Securitization Market Remains Stalled
Since the mortgage-backed securities market’s zenith in 2005, when according to the Securities Industries and Financial Markets Association issuance peaked at $740 billion, the market for private-label securities (those not backed by the US government via Fannie Mae and Freddie Mac) has plunged 99%. But ever since the boom’s big issuers like Goldman Sachs, Morgan Stanley and UBS all but shuttered their mortgage desks, they have been biding their time to when such securities were once again economic to create. Ratings agencies, namely Standard and Poors and Moodys, have altered their models such that issuances are no longer profitable, so precious few new securities have been issued. Redwood Trust, a California-based mortgage investment company, is one of the few firms doing new issuances and all have been of the jumbo variety. Even though others would like to follow in Redwood’s footsteps, until the regulatory landscape becomes far clearer, few will.

12. Housing demographics of young people
After peaking at nearly 70% in 2004, the US homeownership rate has tumbled to around 66%, a level not seen since 1998. Young owners, in particular, have been hardest hit. According to demographer Cheryl Russell, homeownership among 30-34 year olds is falling faster than any other age group: A loss of middle class wealth, student debt loads and uncertainty about the future are just some of the reasons young people are shunning homeownership. Couple that with trends towards transience and a general movement towards smaller spaces and city-centers, and the outlook for rentals starts to look pretty good. It’s no mystery why the real estate investment community can’t get enough of multi-family.

To call the US housing market anything but distressed would be foolish. But to mistaken a distressed housing market for one to avoid would be even more so. And so we plunge, headlong into 2012: Good luck out there.

This post first appeared on Minyanville.

It wasn’t so long ago that foreclosure relief programs had near-unanimous support in the political community. There were elections afoot after all, and something had to be done about the millions of homeowners facing the loss of their home.

But as data continue to show that loan modification and short sale initiatives are floundering and austerity emerges as the buzz word for the upcoming 2012 elections, such programs are on the chopping block. The House of Representatives passed two bills last week that evidence the lack of support for foreclosure prevention programs that have failed to stabilize the tattered housing market.

Last Thursday, the House voted to end the Federal Housing Administration’s short refinance program, which aimed to help borrowers refinance their underwater mortgages, and on Friday passed a bill killing a Housing and Urban Development program that provides interest-free loans to homeowners who have lost their jobs. But as HousingWire reports, any push to terminate the programs may not make it to the finish line. A source within the Senate called the bills “dead on arrival” and the Obama administration said the president would veto the bills if they make it to his desk.

Meanwhile, House Republicans and even some House Democrats are working on similar bills to kill the Home Owner Modification Program, or HAMP, and Home Affordable Foreclosure Alternative, or HAFA, which push banks to modify delinquent mortgages and accept short payoffs, respectively. A short payoff (also known as a short sale) is when a bank allows to the homeowner to sell the home for a lower value than the mortgage. Both programs were Obama-led initiatives that promised relief for troubled borrowers. Actual results have been underwhelming, at best.

The specter of ending borrower assistance programs is a mixed bag for big banks like Wells Fargo (WFC), JPMorgan Chase (JPM), Citigroup (C), and Bank of America (BAC), who still retain billions in exposure to delinquent mortgages. On the one hand, less federal pressure to accept short sales and complete loan modifications could mean that banks take fewer losses in the near term.

On the other hand, homeowners eligible for assistance would are almost certainly end up in foreclosure if the programs get nixed. Foreclosure remains the least “profitable” exit scenario for banks, as carrying costs, home price depreciation and liquidation expenses make taking a loan through the entire repossession process a costly endeavor. A higher foreclosure rate means that banks would likely increased losses from a larger portion of their delinquent loans ending up real estate owner, or REO.

Certain real estate investors however, would cheer this possibility, as recent foreclosure moratoria stemming from last year’s robo-signing scandal has left foreclosure buyers starved for projects.

In the long run, winding down ineffective foreclosure prevention programs is the healthiest option for the housing market and the nation’s homeowners at large. The longer millions of distressed mortgages loom on the horizon, the longer a true recovery in the housing market will be forestalled. Without federal pressure, banks are more likely to make modification and short sale decisions based on economics, rather than politics.

Despite being now five years into the housing downturn and with prices nationwide down by more than 30%, buyers remain wary due to the vast uncertainty about how the logjam of potential foreclosures will play out. And until the we clear the overhanging supply that will be seeping out into the market, real estate will continue to be a drag on the economy.

This post first appeared in: Cirios Trends – March 2011

Thus far, 2011 has been nothing if not newsworthy.

Economic data, financial news and even foreclosure scandals have been supplanted as headline fodder by the historic events taking place in North Africa and the Middle East. It is an exciting, if not somewhat terrifying time to be alive.

Yet even as news breaks around the world, most people wake up, shower, grab a cup of coffee and go about their lives. They drive to work, answer emails, surf the Internet and go back home, taking the inevitable curve balls that life throws in stride because, well, its what we have to do. The economy, however smarting, rumbles on.

Recent jobs data would even have us believe that the recovery is gaining steam. Data, however, can be misleading. The underemployment rate, measured by polling company Gallup, has essentially remained unchanged since this time last year, painting a bleaker picture than government employment data. Meanwhile, certain industries like technology and renewable energy are hiring at a brisk pace, muddling the employment picture even further.

And then there’s oil.

Unrest in the Middle East and the impending summer driving season have pushed prices at the pump up to more than $3.50 per gallon nationwide, and over $4.00 at some Bay Area stations. So much for that road trip.

So what does this all mean for the housing market? We continue to see the localization trend take shape. That is, fundamentally strong markets are outperforming those that are further from job centers or otherwise less desirable in a challenging economic environment. This is a trend we have discussed for months, and one that is now showing up in the data. (We discuss this further in our City Spotlight on Redwood City).

We view this as a healthy market development, one that indicates a market that is getting better, not worse. Price declines are still on the horizon in many areas, but the sky is no longer falling (in the housing market, anyway).

Lastly, we’d like to address a frequent question we have been receiving from the real estate investor community: “Where are all the REOs?” There is a distinct shortage of new bank owned homes (or REOs) coming to market. Investors are getting antsy.

From November of last year through January, there was effectively a nationwide moratorium on foreclosures. The robo-signing scandal coupled with a seasonal freeze around the holidays meant
foreclosure proceedings were delayed almost across the board.

It takes around 90 days for the average property to go from foreclosure sale to listed REO, so properties (not) foreclosed on during the recent moratorium would have been coming to market now. Most banks restarted the foreclosure machines in February, so a normal flow of REO listings should come to market by April.

Sound far-fetched? The 2008 moratoria led to an inventory shortage in early 2009 and a market low that April. The question then becomes whether history will repeat, rhyme, or something else altogether in the coming months.

This piece first appeared on Minyanville.

Almost five full years into the housing downturn, it’s still cool to be bearish on real estate. But cool isn’t always right: Despite headwinds such as looming shadow inventory, a lackluster job market, and geopolitical instability, there are plenty of reasons why rose-colored glasses may be the real estate eyewear of choice.

Below are 10 reasons why it may finally be time to be bullish on housing … but first, one huge caveat.

The local bottom that the broad housing market experienced in April 2009 may yet be surpassed to the downside. If it is, housing bears will pound their chests, stubborn pessimism vindicated. They will be mistaking the trees for the forest. This recovery, which in many areas remains in full force, has been, and will continue to be, highly local in nature. Fundamentally strong markets have thrived, while weak ones have languished. National, state, and even city-level indicators have been masking trends that are ongoing on a neighborhood level. This will continue, and those that ignore it will miss out on countless opportunities.

So without further ado, 10 reasons to be bullish on housing:

1. Jobs. Housing follows jobs. Period. And while the job market is still bunk in many areas, pockets of strength are emerging. After Google announced it would be hiring as many as 6,000 new employees, the Silicon Valley powerhouse received 75,000 applications in two weeks. The company is looking to retain talent in its fight against local rivals like Apple, Salesforce.com and Yahoo, along with social media upstarts like Facebook, Twitter, and Zynga. If housing really does follow jobs, the San Francisco Bay Area may prove to be a bright spot in 2011.

2. Jobs. At the risk of being redundant, housing follows jobs. Consumer confidence is close to reaching last spring’s high point, the most optimistic the US has felt since 2008. And while hiring hasn’t restarted in earnest, firing has slowed to a drip. If you haven’t been fired yet, chances are your job is reasonably secure. Job security drives optimism, planning for the future and … home buying.

3. Pent up demand among young adults. Consider this: 2006 college grads entered the labor market just as home prices began to collapse. Those who still have a job kicked and scratched their way through the Great Recession and are now 27, perhaps married or getting there and kids may be on the horizon. Some were even smart enough to save some money. According to a graph produced by economist Tam Lawler and posted on Calculated Risk, today’s young adults are under-represented as homeowners compared to historical norms, and a disproportionately large chunk are living at home. As the job market crawls back to life, this trend is likely to reverse. And if the apartment market’s snappy performance in 2010 is any indication, it already has.

4. Foreclosures. Frankly, I’m getting tired of people claiming that an impending flood of distressed real estate is going to torpedo home prices. If you’re making that case, ask yourself if you really, truly have any idea what you’re talking about. Banks are rational actors, and as much as Bank of America, JPMorgan Chase, Citigroup, Wells Fargo and the rest are demonized, they rarely willfully destroy the value of their own assets. Which is exactly what flooding the market with bank-owned properties would do. Coupled with political pressure and an ever-increasing maze of foreclosure litigation gumming up the repossession process, foreclosed inventory will continue as its steady stream. It will take years (around four based on current estimates) to work through shadow inventory, but there will be no flood.

5. Inflation. While much is made of inflation in the media, few pundits actually understand it. Inflation expectations, not inflation, is what we should be worried about. Things get scary when consumers start believing that prices are rising, or about to rise. Rational economic actions take hold, and rather than filling their tanks when empty, drivers fill whenever they pass a gas station. The expectation of higher prices, not higher prices themselves, is what changes economic actions. Rising inflation expectations pull demand forward, pushing up prices in an inconvenient self-fulfilling prophesy. Historically, real estate has been a rather good hedge against inflation. As people start to get nervous about inflation, they buy real estate. For more on how good a hedge real estate has historically been against inflation, see my firm’s analysis a few weeks ago: If You Fear Inflation, Should You Buy Real Estate?

6. Higher rents and low interest rates. Ask a prospective tenant in a major metropolitan area how the apartment search is going and the response will not be pleasant. Rents are rising, inventory is down, and landlords are back in the driver’s seat. And despite a recent bounce, interest rates remain historically low. High rents and low interest rates push would-be renters towards buying, particularly in areas with job markets that are relatively less weak than the country at-large.

7. A booming apartment market. Investors are snatching up multifamily properties as positive demographic trends, low interest rates, and perceived values attract professional and amateur buyers alike. Homeownership is at a 10-year low, young adults are moving out of their parents’ basements and into apartments, and leverage is fantastically cheap. What more could an apartment buyer want? The multifamily space typically recovers first, and if history is rhyming in even the smallest way, this is good news for housing.

8. Investor appetite remains strong. From fedora-hat donning, Hawaiian-shirt wearing, clipboard-scribbling, earpiece-whispering professional investors at the courthouse steps to vulture funds armed with hundreds of millions of dollars, investor demand for real estate remains robust. Distressed opportunities — across all types of real estate — have come to market slower than expected, which means buyers have had more time to hit the pavement and raise money. With limited opportunities, competing buyers are driving up prices of distressed assets: For every well-priced foreclosure there are a dozen all-cash buyers looking for a deal. And don’t forget the baby boomers, the first of which turn 65 this year. While many are eying a trade-down into a smaller, more retirement-friendly home, even more are looking for reliable fixed income to pay for rounds of golf and tennis lessons. More than a few gray-hairs view real estate as their path to comfort during the golden years.

9. The stock market. With the Dow Industrials above 12,000 and the S&P 500 topping 1,300 for the first time since mid-2008, IRAs, 401(k)s and trading accounts are feeling fuller than they have in years. The wealth effect is in full effect, as buyers look to sell stock for a down payment and the confidence to pull the trigger on a new home.

10. Confidence. If you’ve made it this far without either scrolling down to question my sanity on the Minyanville message boards or falling asleep, I salute you. And for the precious few readers who are still with me, consider this very important question: Do you feel better or worse about the US economy, and more importantly your own personal economy than you did two years ago? This is not a political statement: Challenges remain, to be sure, but we Americans are a stubbornly resilient, optimistic bunch. Confidence is relative, and for a country that has been through economic hell and back since 2008, we are in remarkably better shape. Confidence in the present builds confidence in the future, and confidence of all types increases risk-taking activities. Admittedly when you have seen the depths of despair, a single ray of dim light can feel like high noon, but it doesn’t matter. Confidence is a trajectory, a transitory voyage through time that is more accurately measured against where you just were than looking at the last time you were here. The fact that most people believe that we’re no longer headed for apocalyptic collapse is, as they say, a good thing.

This post first appeared in: Cirios Trends – Special Edition: 2010 Real Estate Roundup

A 2010 housing market recap would be incomplete without a rundown of what has become known as “Foreclosure-Gate,” a foray into the procedural minutiae of distressed mortgage servicing.

In September of this year – in the midst of the crucial mid-term elections – several large banks, including Ally Bank (formerly GMAC), Bank of America, and JPMorgan Chase, acknowledged problems with their foreclosure procedures. Bank employees, in addition to third party mortgage servicers and legal vendors, were found to have signed as many as several thousand documents a day, at times without personal knowledge of the facts they were attesting to in courts.

The practice became popularly known as “robo-signing” and sparked fresh political wrangling over the process by which Americans are forcibly removed from their homes.

In the wake of press reports and political backlash, lenders froze foreclosures and initiated internal reviews in the hopes of swiftly (and correctly) resuming foreclosures. The review process, however, has been anything but swift.

All 50 state attorney generals filed suit against transgressing lenders, in no small part because many were up for reelection at the time. By late November it was rumored that both sides were working towards a settlement. Some reports speculated the settlement could include: 1) a fund that banks pay into to compensate borrowers whose mortgages were wrongfully foreclosed; 2) banks eliminating the dual track of simultaneously reviewing modification requests and advancing the foreclosure process; and 3) a third party mediator review of cases where borrowers claim a foreclosure was in error.

As of publication, no actual settlement has been announced and repossession proceedings in many states remain delayed.

As reported in the Washington Post, mortgage industry representatives, including executives at Fannie Mae and Freddie Mac, have testified in front of Congress that mortgage servicers and the law firms filing foreclosure actions are to blame. Vendors, for their part, argue that Fannie and Freddie set policies and procedures that encouraged the sort of cost cutting automation now blamed for the errors.

In the rush to provide competitively priced services and reduce overhead, mortgage servicing companies and foreclosure filing law firms introduced high levels of automation to the document-intensive foreclosure process. The rub, however, was that human
reviewers would have to handle more and more files, with less and less time dedicated to each one.

For example, the ABA Journal reported on December 3, that a Pennsylvania law firm, Goldbeck McCafferty & McKeever, was accused of the unauthorized practice of law for non-attorneys routinely preparing and filing foreclosure suits without direct attorney oversight, including signing the purported attorney’s name themselves. In other instances, it has been learned that reams of documents were signed via stamps and that the signers had not actually read the documents they were signing.

Further revelations as to the mechanical foreclosure processes in place are likely to increase, which could continue to cause undesirable consequences to the entire housing market.

First, foreclosure freezes have resulted in delays in the healthy clearing of housing inventory via foreclosure. According to ForeclosureRadar, in Arizona, California and Nevada, the number of properties hitting the auction blocks has dropped more than 30%.

Second, investors that were buying distressed loans and foreclosed homes at auctions have become more cautious. For vulture investors buying defaulted loans and flippers buying REOs at auction, speed is essential to their investment return models. If more homeowners are successful in delaying foreclosures due to shoddy paperwork by servicers and law firms, what is to stop homeowners from attempting further delays even after an auction sale? This notion of continued delays has investors tweaking their pricing models to the downside.

Third, individuals buying REO properties on the open market have been more hesitant to purchase foreclosures due to the media’s regular coverage of the Foreclosure-Gate debacle. Many would-be buyers have begun to believe that if they purchase an REO, they could later lose the home to a former owner filing a lawsuit claiming they were incorrectly foreclosed upon. If fewer investors and homebuyers are interested in purchasing REOs, more REOs will languish unsold on the market, further eroding prices.

Unsavory as it may seem to be profiting from foreclosures, these players are vital to the process by which over-leveraged housing stock is flushed through the system. This price discovery is the only way a sustainable bottom in home prices will be found.

These consequences point towards further downward price pressure in the broad housing market. Until banks are able to legally move forward with the clearing of the large inventory of foreclosures, a true recovery in the housing market will not take root.

This post first appeared in the September edition of: Cirios Trends: In Search of Real Estate Opportunities

In a financial landscape marred with uncertainty, there is one constant, one thing that “everyone” knows: Housing is in trouble. And while the bears certainly have ammunition to support their pessimistic case, history tells us that when everyone is looking one way, smart investors should be looking the other.

The federal government’s determination to prop up housing at all costs is creating pockets of opportunity, even as data point to an increasingly bleak picture. We’ve heard the story for months: Tax credit expiration, weak employment outlook, looming shadow inventory, tight lending environment, etc. And it’s all true.

Meanwhile, billions of dollars continue to be thrown at the housing market, in the desperate hope that home prices can be kept from falling (again).

This flood of money is keeping mortgage rates low, which benefits not just hard hit markets, but all markets, including those poised for fundamental growth. Buyers in markets that don’t need government support, those that are strengthening because they are becoming more popular with wealthier buyers, are benefiting from stimulus pouring in to help distressed markets.

Recently, on the same day the financial media was obsessed with existing home sales data that painted a stark picture for the future of housing, we checked on a house in Bernal Heights, a neighborhood on the outskirts of San Francisco, that had gone under contract in just a few days. The transaction had closed, well above list, with a note that there had been 13 offers.

Apparently, Bernal Heights didn’t get the memo that housing is dead.

Bernal Heights isn’t unique, despite being one of the strongest real estate markets in the Bay Area. It is one of the last affordable neighborhoods in San Francisco (on a relative basis of course), it has a growing main drag and is well-poised to benefit from large scale redevelopment plans already underway (see last month’s Cirios Trends that discussed the Hunters Point redevelopment project).

All over the country, there are similar pockets of fundamental growth. Neighborhoods are changing, jobs are being created, people are moving who need places to live. Meanwhile, the vast majority of
housing markets remain weak, plagued by oversupply, anemic job markets and a limited pool of prospective buyers.

These struggling communities are the focus of the trillions of dollars in housing stimulus that have driven interest rates to historic lows and kept distressed inventory off the market. These unsustainable policies have, unwittingly, doomed most distressed markets to stagnation for years, if not decades, by preventing the legitimate price discovery required to find a sustainable bottom. On the flip side, this massive injection of cheap funding is accelerating demographic shifts already underway.

So while housing bears look at national data and proudly remind us how right they have been about the double dip in housing, they risk throwing the baby out with the proverbial bathwater. There continue to be opportunities out there, as long as you know where to look.