Recovery in the housing market, and the economy at large, is dependent on what the government does — and doesn't do — to influence the recuperation, according to a panel of economic observers at a real estate conference in New York.
"It's hard to be wildly optimistic, but there are some encouraging signs. From where we've been everything looks up," said Joel Singer, CEO of the California Association of Realtors. "We'd be kidding ourselves to think the market will turn and look like it did four or five years ago, but there is long-term opportunity."
Singer noted the one large concern is the growing number of states running large deficits. One way or the other, there's going to be another deleveraging, particularly in state-funded pension funds and "state debt and national debt both won't be eased easily," he said.
Federal Reserve efforts to flood the market with liquidity may help banks reduce the losses they'll ultimately take on toxic mortgage assets because of the Fed's recapitalization efforts.
"At some point, you're going to see an unintended consequence of this effort of stopping the deflationary credit crisis," said Noah Rosenblatt, founder of real estate blog UrbanDigs.com.
"We're down a track where government has to get smaller in order to survive," added Ted Jones, senior vice president and chief economist of Stewart Title Guaranty Co.
The return of lower unemployment will be a major factor in economic recovery, but government budget woes could slow down recovery.
"Many states and local governments are going to have to cut employees and that’s a drag on the employment market and consumer confidence," said Carter Murdoch, senior vice president and national affinity business development executive at Bank of America.
Murdoch also said 2011 will be marked by high volume of distressed properties hitting the market, depressing prices, which will slow down the housing market's ability to help fuel broad economic recovery.
"The number of distressed properties coming to market in the next three quarters is going to be very significant, and that will impact home prices," Murdoch said. "The reality is we need to get through that inventory."
Meanwhile, in other housing news, the projections for a recovery in housing is less than stirring. The housing market will start its long awaited recovery this year, two key economists predicted at the National Association of Home Builders (NAHB) convention in Orlando.
However, because starts and sales are at such a low point, they warned, even a big percentage jump in the two important indices will not result in much of an improvement.
"We're starting from a soft spot," NAHB chief economist, David Crowe, reminded reporters, noting that the second half of 2010 was "much poorer" than the first six months. "We're coming off such a low base that the market will still be only half of what it should be."
However, a third economist, Edward Sullivan of the Portland Cement Association (PCA), said that Crowe's less-than-arousing projections and those of Frank Nothaft, chief economist at Freddie Mac, were too optimistic.
Sullivan told a separate press briefing he doesn't expect any significant increase in housing starts this year. "Twenty-twelve is the year we're going to start to see a recovery, not this year," the PCA's chief economist said.
Sullivan said job growth will be modest at best this year, lending standards will remain tight, and foreclosures will continue to grow. These three factors, he added, form a "powerful combination" that will keep builders from once again putting their shovels in the ground.
"The only reason to build is to make money," the PCA economist said. "And builders can't do that right now."
But Crowe said 2011 will definitely be a better year for builders, if only because of the underlying demographics. "There's enormous pent-up demand," he said, noting that some two million households that should have formed over the last few years failed to do so.
"The populations should have given us two million more households than it did," the NAHB's chief economist explained. "And they are out there waiting to be the next ones into a new house or apartment."
Crowe also predicted that economic and job growth will both improve as the years goes on. And Freddie Mac's Nothaft agreed, saying that "a less than exuberant opening to 2011 does little to dampen our expectations that the recovery will continue to gather strength as the year goes on."
The NAHB is projecting that builders will start 575,000 single-family houses this year, a 21% increase from an estimated 475,000 in 2010. And it expects single-family starts will reach 860,000 in 2012.
However, the PCA is looking for just 492,000 single-family starts this year and 690,000 in 2012. "Recovery is a long process," Sullivan warned. "It's not going to happen overnight."
Despite housing recovery being questionable, multifamily starts are expected to increase. The NAHB is projecting a 16% increase in multi-family housing starts this year. But the 133,000 units apartment developers are expected to produce will not be nearly enough to meet demand.
Between 250,000 to 300,000 units are needed to keep supply and demand in check, Crowe said. But the capital required to build them is just not there.
"We've got to get back on track," Crowe told reporters during a press briefing. "We still have hopes of answering the demand because we're way behind on household formations. We're 1 to 2 million households under where we should be. But when they start bursting forward, we're going to need apartments because that's where they typically move."
Developers like the Avalon Bay Co. "would love to build more," said William McLaughlin, an executive vice president with the Washington-based real estate investment trust. "We see a number of years ahead of us in which there will be a real disconnect between supply and demand."
Avalon, a publicly-traded company, has little trouble obtaining capital. But that's not necessarily the case for private development firms like Boca Raton, Fla., based Wood Partners or companies such as Michaels Development of Marlton, N.J., which develops affordable rentals.
Even though Woods is 51% institutionally owned, it still operates like an old-school builder that looks to traditional sources of capital. And according to Jay Jacobson, the company's national partner for acquisition and development, national money-center banks have yet to return to the market. Consequently, Woods is using smaller regional and local banks.