One question that I hear most from the people I meet during my travels around the U.S. is whether the deflation of the housing market has run its course. Housing is a very relevant and widely sought necessity, thus the state of the housing market is second only to the weather in terms of popularity as a topic of casual banter. The short answer to the question, however, is no.

While observed prices in many real estate markets are close to the bottom in percentage terms when compared with the peaks of 2005, this does not mean that “normal” volumes of transactions are likely to come back soon. Yes, markets like Arizona and Florida have tightened in some areas, but to use the Wall Street metaphor, this is a stock picker’s market. There are several negative overhangs still affecting behavior in the housing markets — factors are unlikely to change quickly because the numbers are so big and long term in nature.

I recently got a look at the latest presentation from Josh Rosner at Graham Fisher & Co. Rosner makes some downright scary predictions about the end of the U.S. real estate market as we know it. The changes in household formation by age is enough to make me bearish. During the past decade, did we really see up to 4 million households drop from the 35-45 age group of the market? Yes. Guess what that does for housing prices? Nothing good.

Even more profound than the decline in the number of households in the 35-45 age group is the drop in overall homeownership rates for all age groups, clear evidence of the structural changes in the real estate market and household composition that my fishing partner Rosner has been talking about for years.

The homeownership rate fell in the first quarter to the lowest level in 15 years, according to the U.S. Census Bureau. This is more than just post-bubble fallout, though, but rather is a shift in long-term demographics going back to World War II.

Rosner notes that homeownership rates peaked in 2004 and have been falling ever since, in part because more than one third of the pre-crisis market was driven by investors. “A home without equity is just a rental with debt,” observes Rosner, who also notes that Wall Street equities have replaced home prices as the key indicator of economic health among policymakers.

STRESSED OUT LENDERS

Inside the banking sector, the situation facing lenders is equally dire. Real estate owned, or REO, is just starting to liquidate, meaning that banks could be facing years more of above-normal administrative and credit costs associated with real estate. My rule of thumb is that whatever a bank is showing you in terms of REO on its balance sheet is probably half or less of the reality.

One of the most striking indicators of operational stress in the lending sector is the still-high rate of loan losses inside most banks. While charge-offs have fallen back from the crisis levels of 2008 and 2009, visible loss rates are still running two times the levels seen in the mid-1990s prior to the start of the mortgage bubble. Yes, loan losses have dropped to the lowest levels in four years — back to 2008 — but the visible level of loan charge-offs remains high compared to long-term averages.

Another indication of the stress being felt by U.S. banks is the steadily rising levels of expenses related to mortgage related activities. The efficiency ratio for all U.S. banks, which measures the portion of operating revenue taken by overhead costs, is now more than 64% for the entire industry, up roughly 10 points in the past six quarters. With operating income constrained by low interest rates and rising expenses related to foreclosures, many lenders are pinched and this does not make banks easier on credit. Quite to the contrary, banks view deteriorating operating leverage with alarm and generally cut front office headcount in response.

While much of the banking sector and the holders of residential mortgage-backed securities managed to charge-off the worst portions of portfolios, there is still a good deal more loss to be taken on bad loans, REO and litigation. As we’ve noted in these pages, Bank of America and Bank of New York are still trying to settle some of the put-back claims arising from RMBS created by Countywide Financial.

But these put-back claims are just a subset of the tens of billions of dollars in remaining claims against this one lender and securities dealer. The Merrill Lynch unit of Bank America, for example, still faces tens of billions in claims by investors arising from losses on collateralized debt obligations. Lenders like Ally Financial and JPMorgan Chase still face further pain from legacy mortgage exposures related to subprime RMBS from ResCap and Bear Stearns, respectively.

NONBANK SIGNS OF LIFE

There are more than a few signs of life in the nonbank sector, where new lenders are sprouting from the ground like springtime flowers, but in the banking industry all of the signs point to continued retreat from many lending markets. Part of the reason for this pull-back has to do with continued pain from bad loans, but another point is the rising tide of new regulations that are literally forcing banks out of real estate lending. Whether you look at Basel III or Dodd-Frank, all of the new regulations coming out of Washington are antithetical to supporting real estate lending.

You can argue and some do that the real estate sector is on the mend based upon the latest Case-Shiller data, but the fact remains that the smart money in the real estate sector is not the mega private equity funds buying swaths of foreclosed homes in Arizona or Florida. In both cases, I hear that the private equity community has significantly supported near-term home prices simply because PE funds needed to put money to work. Once again, investors are driving the price trends in these rebounding markets, just different investors.

I see some smaller players in the market writing 8% to 9% jumbos in California against 60% loan-to-value ratios in prime locations, a business that makes a lot more sense than the “rags to riches” strategies pursued by larger PE funds. When you see the pricing in the nonconforming channel, it becomes clear that Uncle Sam is subsidizing the housing markets to the tune of 3 to 4 points compared to where a private investor would take that loan.

So if cost of funds is zero under the Federal Reserve’s zero interest rate policy, a 4% to 5% portfolio makes sense. But for a private investor paying 3% to 4% for warehouse funding, you need to see 8% to 9% gross yield to play in first loss on RMBS.

And banks are shying away from writing loans with the government-sponsored enterprises as fees rise.

There are a number of new models in the market, from large-scale rental projects spawned by Wall Street firms to stakeholder firms that effectively become the second lien holder for 80 LTV mortgages in trendy neighborhoods in 400 U.S. metro areas. This type of lending is the more traditional model of nonbank underwriting and requires a great deal of up-front effort compared to the factory model of the large PE firms and zombie banks.

CREDIT UNION LENDING

One part of the lending sector most people don’t think about is credit unions, but here again the impact of the housing crisis is still being felt years after the fact. Back in 2010, several large corporate credit unions failed due to investments in subprime residential mortgage-backed securities. The financial hole left by these losses and other problem assets is something like $30 billion, say my sources, a vast sum compared to the $80 billion total equity of the industry.

Credit unions have less than a tenth of the balance sheet of banks, but faced a much larger loss proportionately than the banking industry during the crisis. The National Credit Union Administration, which runs a taxpayer-backed deposit insurance fund, has been unable and unwilling to tell the industry’s retail credit unions the actual cost of cleaning up the mess. There is more than a little anger among the rank-and-file members of the industry.

This mess is most important because of how it will impact lending for the real estate sector. Just like the bank being squeezed between falling operating income and rising costs, many credit unions are being forced to divert precious cash liquidity to plugging a still yet to be quantified financial hole at the NCUA. The NCUA apparently admits to a number like $15 billion for total losses to the insurance fund, but either way the number is a disaster for the industry and for credit union borrowers.

As the true scope of the financial mess inside the credit union industry is made known to the public and Congress, look for calls to fold the NCUA insurance fund into the FDIC and impose much harsher capital and operational standards on the credit unions which survive the inevitable culling process. As with Basel III and the banks, and the reform of the Federal Home Loan Banks more specifically, this process of fixing the NCUA deficit in the short term will hurt real estate lending by credit unions, which have traditionally been an important source of mortgage credit.

“Housing is clearly starting to rebound, with sales and construction up from a year ago and prices up in February, while private wages and salaries are up 5.3% YOY,” writes Brian Wesbury of FT Advisors. Such optimism, while welcome, confronts some significant challenges ahead, including a smaller homeowner base, uncertain financing and a host of new regulatory challenges for banks and nonbank lenders. For people who want to get back to the good old days before the crisis, the answer is that old adage, namely, that you can’t get there from here.

Christopher Whalen is a regular columnist for HousingWire and senior managing director of Tangent Capital Partners in New York where he provides advisory services focused on companies in the financial services sector. He is co-founder and vice chairman of the board of Lord, Whalen LLC, parent of Institutional Risk Analytics, a provider of bank ratings, risk management tools and consulting services.