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Analysis: In the U.S. housing market, recovery or Lost Decade?

(Reuters) - The worst U.S. housing crisis since the Great Depression has been declared over. But is it?

What some of Wall Street's forecasts for a recovery may be underestimating are tectonic shifts in the U.S. economy that make the housing market a different place from a decade ago.

Record levels of student debt, 15 years of flat incomes and the fact that nearly half of homeowners are effectively stranded in their houses look likely to weigh on prices into the indefinite future.

Several housing experts have said the market is in danger of drifting for years. In a bleaker scenario, the fragile U.S. economic recovery could slip back into recession if Europe's crisis deepens or the political impasse in Washington triggers a new budget crisis, putting the housing market at risk again.

"We've gone through half of a lost decade since the crisis started in 2007," said Robert Shiller, co-founder of the Case-Shiller U.S. housing price index and an economics professor at Yale University.

The so-called Lost Decade in Japan occurred after the speculative bubble in the 1980s, when abnormally low interest rates fueled soaring property values. The ensuing crash has continued to afflict the Japanese economy ever since.

"It seems to me that a plausible forecast is, given our inability to do stimulus now, for Japan-like slow growth for the next five years in the economy. Therefore, if there is an increase in home prices, it's modest," said Shiller.

A Reuters poll published on Friday showed most economists think the U.S. housing market has now bottomed and prices should rise nearly 2 percent in 2013 after a flat 2012.

GENERATION STAGNATION

Consider the plight of college graduates, who go on to become the biggest group of first-time U.S. home buyers.

Many graduate into a climate of falling wages and soaring rents, members of the most indebted generation in history who owe an average $25,000 in student loans.

They elbow their way into a labor market so rough that the number of people with jobs is at a 30-year low, health and retirement benefits are shrinking and the young workers face a greater chance of losing their jobs than any generation before.

For Steve Blitz, chief economist at ITG Investment Research in New York, the housing market improvement has gotten as good as it can without more improvement in the labor market.

"I don't see it worsening unless the economy goes back into a recession, but I think it's more a case of stagnating," Blitz said.

It is not just the employment picture that makes the prospect of a housing recovery so precarious.

Housing prices and income usually move in lock step. But real median household income is stuck at the same level as during the Clinton Administration in 1996 -- at about $49,000.

That means the housing market will remain troubled for "an extended period of time," according to Sam Khater, a senior economist at housing data company CoreLogic.

"It's not about job growth. It's about income growth," says Khater.

Back in 1996, the median home price was around $80,000. When house prices soared to $200,000 in 2006 -- the market peak -- it was due to jumbo mortgages, not jumbo pay raises.

Banks lured consumers with low interest rates that later turned much more expensive and blew up monthly payments, eventually helping to cause the housing crash.

On the one hand, the housing implosion has created a bonanza for those buyers who can take advantage of it: U.S. real estate is now 36 percent cheaper than in 2006.

In nearly every city, it now costs less to own than to rent.

But many would-be homeowners cannot buy. Lenders have virtually locked them out of the market by denying them mortgages, according to statistics from the Federal Housing Administration and a recent Morgan Stanley research report.

In May, consumers able to close on a mortgage had, on average, a near-perfect credit score. They could afford a 19 percent down payment on their new home. And they were still on track to spend no more 24 percent of their income on their new house, according to the Ellie Mae Origination Insight Report.

"Most of the population can't meet current mortgage underwriting standards," says trade publication Inside Mortgage Finance founder Guy Cecala. "They're getting eliminated before they even get to the door."

Some believe this credit freeze is only going to worsen. Washington is considering new mortgage regulations that would shift more responsibility for bad loans away from taxpayers and investors and toward banks.

"If all these new rules that Washington is talking about are put into place, it would be even harder to get a mortgage," said Brian Lindy, an analyst at Amherst Securities Group, which released a report in May entitled "The Coming Crisis in Credit Availability."

Even for those who can afford to, buying a house can be a harrowing experience. After watching a nation crash and burn, plenty of people remain in shock. They are loath to take the risk anytime soon.

As research firm S&P Capital IQ's Robert Kaiser said at a recent housing conference: "Consumer confidence simply hasn't recovered enough to support the housing market."

BUSTED CONVEYOR BELT

The housing market, as economists often like to point out, is a conveyor belt. A homeowner sells a house. The new buyer moves in, and the seller buys a better house. In time, that buyer in turn sells, and buys a better house.

Normally these so-called move-up buyers are the housing market's biggest consumer group. They are what keep that conveyor belt moving.

Today the apparatus is broken.

That's because about half of homeowners with mortgages simply can't move.

Twenty-four percent owe more on their houses than they are worth. Another 25 percent are equity poor, meaning they have less than the 20 percent of equity required for a down payment to trade up to a new home, according to housing-data company CoreLogic.

Sean O'Toole, the CEO of foreclosure-data aggregator ForeclosureRadar.com, estimates that it will take at least another decade, at the housing market's current pace of growth, for homeowners who are underwater just to break even on their houses.

"We went from $4.5 trillion of mortgage debt in 2000 to $10.5 trillion of debt in 2008 -- and we are still only down to $9.8 trillion," says O'Toole.

"All those people with negative equity, they can't sell. They are stuck in a prison of debt."

A HIT WITH MULTI-GENERATIONAL HOMES

The U.S. housing market is actually hundreds if not thousands of markets.

Cities such as New York and San Francisco have joined other world cities, like London and Hong Kong, to form a global housing market that aligns its fortunes with the wealthy elite.

Then there's Stockton, the California city that filed for bankruptcy in June. A recent Rockefeller Institute of Government research report suggested it could turn into a ghost town with its lack of jobs and abundance of abandoned, foreclosed homes.

Still, there's no doubt that in most places the housing market appears to have bottomed out and is now gathering strength.

The places that were hit hardest -- like the warm states where baby boomers go to retire -- are snapping back, and some states with strong income and job growth, like the natural gas haven of North Dakota, are solid.

"I don't think it's a head-fake, because when you look across all your price measures and construction measures on the starts side, you're seeing broad-based indication of improvement," says Beata Caranci, deputy chief economist at TD Bank Group in Toronto.

But even those who say the recovery is on are subdued. "We have to be a little bit cautious," said Caranci. "It's the beginning of a recovery."

The Case-Shiller home price index, considered a bellwether of the U.S. housing markets, rose in May for the third consecutive month.

Those price hikes, however, reversed just a sliver of the wealth lost since the housing peak: $200 billion of the $6.7 trillion that has evaporated since 2006, according to a recent Bank of America report.

Some of the biggest jumps -- such as the 10 percent year-over-year price gains in foreclosure-filled cities like Phoenix and Miami -- were largely due to banks holding back inventory. That's because of lingering legal problems from the so-called robo-signing foreclosure scandal as well as a reluctance to flood the market, according to CoreLogic's Khater.

"Don't let the volatility in prices fool you," he said. "Yes, prices are increasing in some markets, but in the longer term it has to come back to incomes, and unless incomes are increasing, price increases are not sustainable."

At this point in a typical cycle, executives at the homebuilding companies are usually the loudest members of the housing recovery pep squad. Yet the mood has been subdued in the most recent round of earnings conference calls with homebuilder executives.

In late June, Lennar, the third-largest homebuilder in the United States, reported a rise in new orders for the fifth straight quarter, helping to push share price to a year high in July.

Executives had foreseen that, after the housing crash, family members would start to live together as a way to save. Lennar started designing a new home that included a 600-square-foot apartment with its own entrance called the "Multi Gen Home." It has been a hit.

Nonetheless, Lennar's chief executive officer, Stuart A. Miller, told analysts in June that he was nervous about uttering the word recovery.

"I don't think that there's reason for exuberance right now -- except for the fact that the beatings have stopped."

(Additional reporting by Cezary Podkul and Tim Reid; Editing by William Schomberg, Mary Milliken and Prudence Crowther)

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Wells Fargo turns to cost cuts as recovery stalls (AP)

By EILEEN AJ CONNELLY, AP Business Writer Eileen Aj Connelly, Ap Business Writer – Tue Jul 19, 6:56 pm ET

NEW YORK – The nation's largest mortgage lender is turning to cost-cutting as the economy sputters and the grinding housing slump means waning profits from new mortgages.

Wells Fargo & Co. on Tuesday posted a 30 percent leap in second-quarter profit, boosted by the release of a big chunk of the money set aside to cover defaulted loans and foreclosed mortgages. But the San Francisco bank reported a sharp decline in the number of new mortgages it wrote, reflecting the ongoing weakness in the housing market and a drop in refinancing activity.

Bank executives detailed plans for cutting expenses to $11 billion per quarter by the end of next year. Expenses in the quarter were $12.48 billion.

The San Francisco-based bank said net income for the three months ended June 30 rose to $3.73 billion, or 70 cents per share, compared with $2.88 billion, or 55 cents per share, in the year-ago quarter.

Analysts, on average, were expecting profit of 69 cents per share, according to data provided by FactSet.

Net interest income, or the money earned from deposits and loans, fell 7 percent to $10.68 billion from $11.45 billion last year.

Total loans fell 2 percent to $751.92 billion, although the bank did report growth in auto loans, private student lending and credit cards.

But core deposits rose 7 percent to $808.97 billion. That in part reflected a 7 percent jump in consumer checking accounts, which Chief Financial Officer Timothy Sloan attributed during a conference call in part to the ongoing combination with Wachovia, which Wells bought in late 2008 amid the economic meltdown.

Noninterest income, or money earned from fees and investments, slipped 2 percent to $9.71 billion from $9.95 billion last year.

Wells Fargo does not rely as heavily on investment operations as most of the other big U.S. banks, which have leaned on gains in that arena to offset weakness in retail banking operations. But it did report a 7 percent rise in trust and investment fees to $2.94 billion, which helped boost noninterest income.

Mortgage banking revenue, a core profit generator, dropped to $1.6 billion from $2 billion last year, however.

The bank wrote $64 billion in mortgages during the quarter, down from $81 billion a year ago, reflecting the widespread slump in housing sales nationwide and fewer refinancings, which helped buoy the mortgage business in recent quarters.

Paul Miller, an analyst with FBR Capital Markets, said mortgage revenue came in below his expectations, but did not contract as much as some other banks have reported this quarter.

In an interview, Sloan said the decline reflected the winding down of refinancing in the current low-interest environment. He said the bank sees the overall mortgage market as "more or less stabilized, based upon where the economy is today." The pipeline of new mortgages was up slightly at the end of the quarter, he said.

Overall, improvements in the payment habits of customers with outstanding loans provided the biggest boost to earnings.

The amount of loans it wrote off because of default, known as charge-offs, dropped for the sixth straight quarter to $2.84 billion from $4.49 billion last year. Better results came in both commercial and consumer loans, including home mortgages and credit cards.

The sharp decline in write-offs allowed the bank to release $1 billion from its loan-loss reserves, the money set aside to cover bad loans.

Another positive for Wells came in its credit card business.

Fees from credit cards and debit cards jumped 10 percent, because of increased spending by card users and growth in new customers. New credit card accounts shot up 63 percent from a year ago.

Wells Fargo, which has a much smaller credit card business than its rivals, has traditionally concentrated on selling credit cards to existing deposit customers, rather than mailing offers to a broader swath of consumers. Sloan said a good portion of the increase came from extending that tactic by selling new cards sold to former Wachovia customers. Card accounts more than doubled in Eastern states, where the bank is continued its combination with Wachovia.

The CFO said card growth also reflects efforts by the bank to open new accounts with mortgage holders and brokerage clients who don't necessarily have checking or savings accounts with the bank. "We're trying to grow penetration rates with other customers that have other products, not just deposit products," he said.

During the call, Sloan said the new federal rules capping the fees that banks can charge retailers for processing debit card transactions, which take effect Oct. 1, will cut about $250 million from quarterly earnings. "We expect to recapture at least half of this over time, through volume and product changes," Sloan said

Still, with mortgage revenue declining and the economic recovery having lost steam, the bank is moving to cut expenses.

Sloan outlined a plan to simplify operations and eliminate duplication. Targeted areas include streamlining technology and automation, pushing customers to use online and mobile services that reduce staff needs and reorganizing units like its auto lending business and wealth management. It is also shedding non-core businesses like its H.D. Vest Financial Services unit, which it said last month it will sell for an undisclosed price.

Shannon Stemm, a financial services analyst at Edward Jones, said the bank's discussion of its cost-saving measures helped boost Wells' stock in Tuesday's trading. "They seem to be ahead of their peers in recognizing that the only way to combat revenue weakness during a weak economic environment in the near term is by slashing expenses."

The company's stock added $1.53, or 5.7 percent, to close Tuesday at $28.43.

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Data offers hope for pick up in recovery (Reuters)

WASHINGTON (Reuters) – The number of Americans signing up for jobless benefits fell last week, while housing starts and building permits rose in May, offering some hope the economy could be starting to pull out of its soft patch.

Initial claims for state unemployment insurance slipped 16,000 to 414,000, the Labor Department said on Thursday, suggesting the jobs market was regaining some momentum after stumbling badly in May.

A separate report from the Commerce Department showed groundbreaking for homes rose 3.5 percent to an annual rate of 560,000 units, retracing almost half of April's steep decline. New building permits unexpectedly rebounded 8.7 percent to the highest level since December.

The reports offered at least a hint the economic slowdown that started as the year began could be easing. U.S. financial markets, however, were little moved by the data, which was eclipsed by concerns Greece could default on its debt.

"The broader theme we have to look at is that the pace of job destruction is slowing but the pace of job creation is also a bit tepid," said Ian Pollick an economic strategist at TD Securities in Toronto. A report earlier this month showed U.S. employers added a scant 54,000 workers to their payrolls in May, with the jobless rate rising to 9.1 percent.

LEVELS STILL DISMAL

While both the jobless claims and housing data moved in a better direction, the levels suggested the recovery remains quite weak.

Initial jobless claims remained above the 400,000 level for a tenth straight week. Economists say claims would need to drop below that level to offer a clear sign of an improving labor market.

At the same time, economists have been largely dismissive of moves in U.S. housing data because construction and sales have moved to historically low levels.

A Reuters poll found that economists expect the housing market to sink further this year before prices start rising only marginally in 2012, a Reuters poll predicted.

Home prices -- as measured by Standard & Poor's 20-City Composite Home Price Index -- will fall 5.0 percent in 2011 and rise just 0.5 percent in 2012, according to the poll.

An oversupply of homes on the market, especially foreclosed properties which sell well below their value, has dampened construction and weighed on prices. A survey on Wednesday showed sentiment among home builders at its lowest level in nine months in June.

Data firm RealtyTrac said on Thursday that the number of U.S. homes seized by banks fell in May, but it pinned that decline on processing delays. Banks took over 66,879 homes last month, down 4 percent from April.

Groundbreaking for both multi- and single-family homes rose in May, with permits lifted by a 23.2 percent surge in the multi-family segment. The increase in multi-family units reflects a growing demand for rentals as relentless home price declines encourage Americans to delay home purchases.

GLIMMERS OF LABOR MARKET HOPE

The report on jobless claims showed the number of Americans who continued to receive benefits under regular state programs after an initial week of aid eased to 3.68 million from 3.70 million in the week to June 4, the latest week for which data is available.

Under all benefit programs, including emergency benefits extended by Congress, 7.4 million were on the rolls in the week ended May 28, down about 200,000 from a week earlier.

The data suggested the long-term unemployed were finding it somewhat easier to find jobs, although if May's dismal pace of job creation continues their hopes could be dashed anew.

(Additional reporting by Pedro Da Costa in Washington and Emily Flitter in New York; Writing by Lucia Mutikani and Tim Ahmann; Editing by Andrea Ricci)

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