When will home prices recover? (© Robert Galbraith/Landov)
© Robert Galbraith /Landov
The lowest mortgage interest rates in almost 60 years, plus affordable homes in cities where buyers had been priced out for years, should be turning the housing market around. But the market also labors under heavy burdens, such as high unemployment, tight credit and a glut of foreclosures that are dragging down home prices.
Sales fell off a cliff after the homebuyer tax credit expired. And legal squabbling about the process used to repossess many homes postponed the sale of many foreclosed properties and struck yet another blow to confidence in the housing market.
For the four years beginning with the downturn in mid-2006, the median price of an existing home nationwide fell by 27%, or 7.7% annualized, according to Fiserv Case-Shiller, a home-price research firm. December's median home price was $168,800, a bit more than in 2003.
Among the cities that Fiserv tracks, Merced, Calif., fared worst, with a 68% plunge in its median home price in the four years since the peak, followed closely by Modesto, Salinas and Stockton, Calif.; Cape Coral-Fort Myers, Fla.; and Detroit. Prices increased in just 12 cities, all in upstate New York, Tennessee or Pennsylvania. These cities missed the boom and plugged along at their usual, slow pace of appreciation.

Stuck underwater
The home-price plunge has left 23% of the nation's 53.5 million borrowers underwater, meaning they owe more on their mortgage than their home is worth. Unless they can ante up the difference — an average of $75,000, according to CoreLogic, which analyzes mortgage data — they can't sell, and they can't move. Their choices? Stick it out; ask the lender for permission to sell for less than they owe, aka a short sale; or default.
In Norwood, Mass., south of Boston, Al and Shannon Becker wish they could buy a bigger home, but they're underwater by about $50,000. But the couple have a plan. They bought their 1910 farmhouse, with three bedrooms and two baths, for $389,000 in 2005. By 2006, the property appraised for $423,000, and the couple refinanced, taking cash out for home improvements. Now it's worth $350,000. Still, they can afford to move, and they could come up with the cash to pay off the mortgage.
Instead, they are paying an extra $500 a month on the second mortgage they took out when they purchased the house, anticipating the day when debt pay-down and home-price growth would converge.
Should they walk away? No.
"That would be un-American, and my parents would kill me," Al Becker says.
The price gains that would put the Beckers and the millions of homeowners like them in the black have been tantalizingly out of reach, though glimmers of hope exist. Median home prices increased by 3.6% in the year that ended June 30. Many California cities saw double-digit increases. Prices increased by at least 5% in many cities in California's beleaguered Central Valley and Inland Empire, such as Riverside and San Bernardino, Calif., as well as in Phoenix; Washington, D.C.; Minneapolis and St. Paul, Minn.; and a few cities in Florida.
David Stiff, chief economist at Fiserv Case-Shiller, says those price increases were artificially propelled by the homebuyer tax credit and were not sustainable. The tax credit expired on April 30. By June, sales had begun to slide, and in July, they tanked.
In late summer, sales of existing homes began to climb again, but in the National Association of Realtors' most recent report, December's sales were still 43% below the same period in 2009. The lower the price tier, the greater the decline in sales, which reflected the pullback of first-time homebuyers.
Although this recovery may seem unendurably long, Stiff says that five to seven years is historically a "pretty standard time frame" for prices to stabilize after a large correction. But in the past, some regions suffered longer than others.
For example, Dallas home prices took 12 years to recover after they fell from their peak in mid-1986. This time around, however, the downturn hit more areas because the mortgage-credit bubble was so widespread.
The foreclosure factor
Now, short sales and foreclosures are the driving force behind continued price declines. Throughout 2010, they accounted for about one-third of home sales, with an average price discount of 26%, according to RealtyTrac. More of these sales are on the way, but estimates vary.
Mark Zandi, Moody's Analytics' chief economist, says the foreclosure pipeline holds about 4 million loans that are or soon will be delinquent by 90 days or more. He says he thinks that half of those will end up for sale. He also says that delinquency rates have peaked and that foreclosures will peak this year.
Given current supply and demand, Zandi says, it could take two years to work through the excess inventory, which is concentrated in Florida, Arizona, Nevada, California's Central Valley, Atlanta, the Rust Belt and other spots in the Midwest. The longer it takes to resolve the foreclosure-processing issue raised in October, the greater the backlog of properties — and the more they will depress prices when they hit the market.
But Zandi says foreclosure issues likely will be resolved within a few months, not a few quarters. Even so, foreclosure moratoriums have ensnared plenty of bargain-hunters, including Kerry Deland of St. Cloud, Fla.
Deland moved to St. Cloud, near Orlando, Fla., in 2005. A kindergarten teacher, Deland quickly figured out that on her salary, she couldn't afford to buy a home, especially one with enough land for her horse.
A friend tipped her off to a property that appeared destined for foreclosure. It was a 5-acre spread with a three-bedroom, two-bath house that would have sold for $300,000 in 2005.
Deland watched and waited. In July, the foreclosing lender listed the property for $114,000. Deland made two offers. The first time, she lost out to a higher bidder, whose deal fell through. In late August, she made a winning bid of $111,900. Closing was scheduled for early November, but in October, Deland learned that the seller, Fannie Mae, had imposed a foreclosure moratorium. Fortunately, it offered to extend Deland's contract.
"I've waited this long," she said at the time. "I can wait some more."

A glass half-full
The worst-case scenario for home prices? Slow economic growth and high unemployment drive up the foreclosure numbers, which push down home prices. Consumers refrain from spending, further dampening economic growth and job creation. Demand for homes decreases because would-be buyers don't have a job or don't have confidence that they'll still have one in months to come. Confident buyers hold off because they expect more price declines.
But Zandi says the job market will begin to turn around by middle or end of this year. The Federal Reserve will ensure that mortgages stay dirt-cheap, at least until employment picks up again.
Zandi says that the best reason for a bit of optimism is this: With few exceptions, the market is fairly valued based on the relationship of home prices to income and apartment rents. Some markets have actually become undervalued, which will attract more buyers and investors.
Bank of America Merrill Lynch economist Michelle Meyer says that to frame the housing outlook in a more optimistic light, "Everything has to go as planned."
To buoy consumer confidence and put home sales on a strong, upward trajectory, job growth must be considerable, with the unemployment rate clearly receding. Meyer says she agrees that could start in the second half of this year, but she says, "It will be a slow process."
Fiserv says it expects the housing market to finally hit bottom by the middle of the year, with an additional 7% decline in the U.S. median home price for the year ending June 30. The firm's forecasting model says that prices are 90% of the way back to being in line with household incomes.
Stiff says that the housing market is now "bouncing along the bottom," with buyers and sellers creating price volatility as they try to match bid and ask prices. The firm predicts that in many cities, prices will begin to tick upward again in 2012.