The year 2012 was a turning point for housing with the sector contributing to overall economic growth for the first time in years.
But the nation’s labor market is still slow to pick up speed, suggested Richard Koss, director of mortgage market analysis for Fannie Mae, and there are other serious headwinds still facing the housing recovery.
While speaking at the SourceMedia mortgage servicing conference in Dallas, Koss depicted a market where home prices are affordable on the backs of low interest rates, but qualifying for a mortgage or even having enough saved up for a downpayment remains a challenge for many Americans, especially the nation’s youngest adult population.
And until the jobs situation fully recovers, housing may hit the ceiling.
"We lost about 9 million jobs in the private sector from the peak to the trough of the recession," Koss said. "We have recovered about 6 million of those jobs, so we are two-thirds of the way back. But it has been four years, and we really should be well past that because the overall population has grown in the meantime, so it still remains a pretty anemic recovery."
Since the housing market generally leads a nation out of recession, the recent downturn broke with tradition, Koss pointed out. For starters, construction hiring failed to contribute to overall job growth until a year after the economy itself recovered.
The country also lost 2 million construction jobs during the recession and has recovered only 300,000 of them, he added.
Koss, on the other hand, is comfortable with today’s rising home prices, but sees lingering risks.
"If house prices begin to rise and incomes are stagnant … it can be considered a little bit vulnerable. But, by historical standards, housing is affordable. The only caveat being that you have to be able to get credit, and it is not easy to save 20% down for a house in this day and age with incomes not rising," he explained.
Servicers and lenders also show less appetite for risk, making it unknown when the market will originate more loans with slightly lower FICO scores.
"In the wake of the bubble bursting, we obviously raised our credit standards, but loans are consistently being delivered to us at the top end of the standards," Koss said.
"This has something to do with servicer capacity. With constraint in capacity and underwriting, if you can only make so many loans given the resources you have, you are going to do more of higher quality."
At this point, it's unknown if risk appetites will become more aggressive, including other loans, or stay in a risk-adverse zone for years.
Yet, housing is not out of line with market fundamentals, Koss said. Sellers are not putting as much inventory up for grabs and that is suppressing supply and lifting prices.
Koss views the shear wealth effect of rising prices as a silver lining in what's otherwise an uncertain climate.
"If you do not have confidence in the main asset that you own if you are underwater, you are likely to act like a damaged consumer. It’s very hard for you to go out and confidently spend money," he explained.
On the flip-side, with prices rising again, more borrowers are reaching positive equity levels, giving them more economic confidence.
But the real question Koss said is whether the next generation of homebuyers will view the process in the same way and even want homes.
He points to the latest Fannie Mae survey in which a majority of respondents under 35 said they would still like to buy a home in the future.
While this is good news for the market, the under-35 crowd is still wading through potential credit issues and student loan debt, making the possibility of a purchase a long-term risk for buyers, sellers and the market.