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.
RELATED: Housing Crisis Could End Suburbia As We Know It
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.
RELATED: The 10 Top Cities People Are Moving to in 2012
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."
(by Michelle Conlin and Leah Schnurr, additional reporting by Cezary Podkul and Tim Reid)
