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The housing industry is showing some small but smart signs of improvement. But could these green shoots get mowed down before they can blossom? Here are four things to keep an eye on.

Some good signs are emerging in the housing industry. Selected markets around the country are stabilizing or experiencing modest growth. Nationally, inventory continues to fall towards market equilibrium. International dollars are helping urban areas absorb inventory and upper-end properties. Investors are gobbling up good deals and mopping up the distressed segment. Baby Boomers are cashing out of suburban homes bought long before the bubble, and taking that money into cities and luxury communities. By many accounts, there are some good things happening.

Brokers and agents are putting the recession to work for them, too, fundamentally altering organizational structures, improving efficiencies and trying new models (like auctions or no longer paying for leads) to drive down costs and drive up value to consumers. While some companies have closed their doors, others are springing up, without the legacy costs – and thinking – about how to sell properties. Little things – like improving standards, diligently pursuing leads and bringing an iPad to a listing presentation – are proving effective in creating opportunities in every market.

All good news. But let’s not let our guard down just yet.

First, significant headwinds remain. High unemployment continues to impede sales growth, especially amongst younger buyers: 18 to 24 year olds face 18%-plus unemployment, and carry high college debt loads. That is stalling many first-time buyers, even with today’s low prices. Foreclosures undermine many neighborhoods, not just in the sand states. New York will require 8 more years of red tape to clear the current backlog. Throw in underwater (but not delinquent) mortgages, and a usually more mobile workforce remains trapped, unable to move to improve wages and opportunities. Let’s not forget the Federal Reserve, who has announced its intention to artificially undermine interest rates and encourage 2% inflation targets for the next few years. The former keeps credit tight; the latter destroys consumer purchasing power.

These are all serious headwinds that aren’t going away soon.

Which means you have to keep them factored into your business plan for 2012 and beyond. There will be plenty of opportunities in the marketplace, but you must remain realistic even as you become more optimistic. That means keeping at least one eyebrow raised when you hear the media start repainting the picture. It’s an election year, after all.

Still, plenty of great strategies exist for this year: Targeting qualified Gen X move-up buyers, tapping into growing rental demand, building relationships with investors using cash, learning the language of foreign buyers, and targeting sellers with decades of equity.

It would be unfortunate if we gave up on our diligent industry innovations and restructuring, simply because a few trends are on the uptick. We’ve been over-optimistic before, if you remember. That earned us a dangerous bubble. If we relax too soon, it might earn us a quadruple-dip in housing.

Specifically, I’m concerned about lending more than anything this year. It could be argued that foreclosures have been baked into pricing already. It might even be argued that high unemployment and current inflation in energy and food prices have been baked into buyer wage expectations. That leaves as the biggest challenge lending options. That means keeping an eye on four things this year:

  • Home prices continue to fall, while jobless claims continue to rise. This will lead to natural reluctance on the part of banks to lend to anybody but the most solid credit, least risk borrowers.
  • Interest rates remain low and flat. The Fed’s interest rate targets are having unintended consequences. By keeping spreads low, banks see little profit in lending to a shaky housing sector. By promising to keep them low for the next two years, they encourage banks to look for better investments for the long term. Big Banks – currently 50% of all housing lending in America – can easily make money in higher return sectors around the globe, with less risk of political witch hunts, too.
  • Major banks are exiting the mortgage market. Bank of America is trying to shed its correspondent lending business;  GMAC/Ally did it last year in Massachusetts. MetLife exited the forward home loan business earlier this year. Credit unions and local banks are not ready to step into that space.
  • The Consumer Financial Protection Bureau is about to regulate the mortgage industry at unprecedented levels through its “Nonbank Supervision Program.” Essentially, the regulatory burden for mortgage brokers is about to get more complex and bigger. That means new costs for compliance, and guess who pays for those? Consumers, of course. Add in forced settlements for pseudo-scandals like robo-signing, and banks have less and less reason to make housing lending a priority.

The point is, we can’t relax our efforts to keep restructuring the housing industry. Especially if we get over-optimistic, and tell ourselves, it’s finally all coming back! It’s not, and it won’t. Even if money fell from heaven, the shift has already occurred in the fundamentals – of consumers, of demand, of debt, of finance, of regulation. If you’re only trying new strategies until things go back you’ve missed the point of the recession.

Stay focused. Keep on track to innovate. Be happy about successes that happen. Grab onto any momentum that’s building. But stick to your plan to work the market of the future, not return to the market of the past. There are real, measurable, specific opportunities in your marketplace. In fact, as the lending headwinds indicate, more structural changes are coming, complete with yet-to-be-discovered unintended consequences.

Most of all: Manage expectations. Your own, and your customer’s. Sellers must remain committed to sensible prices for buyers constrained for credit. Buyers must understand the risks of low-ball offers and further waiting on the sidelines: borrowing costs are prepped to soar. Agents must take the dangers of sitting on unsellable inventory seriously. Brokers must plan carefully for new and multiple revenue streams to thrive in the future.

Water the shoots. Nurture them. But keep an eye on the horizon, because there are still a few more storm clouds to come.