Monday, January 31, 2011

Mortgage Finance Overhaul to Raise Costs, Reduce Home-Ownership

A map of states and cities where Wells Fargo o...Image via Wikipedia
In spite of differences between Democrats and Republicans on reforming housing finance, both sides back proposals that would make mortgages more expensive and difficult to obtain.

Government officials and lawmakers want to make the market less vulnerable to another credit crisis, and all the options lead the same general direction: Borrowers will need larger down payments than in the bubble years, have higher credit scores, and pay extra fees to cover risks and premiums for federal guarantees on government-backed mortgage bonds. While those measures would create a sounder system, they also mean that fewer borrowers will qualify for loans and the national home ownership rate -- already on the decline -- will continue to slide.

During the bubble, mortgages were given to people “who clearly should not have gotten them,” David Stevens, commissioner of the Federal Housing Administration, which guarantees loans to first-time and low-income home buyers, said in an interview. “It would not be productive if we had that same loan access going forward.”

Ownership rates, which rose from 63.8 percent in 1994 to 69.2 percent a decade later, have since dropped to 66.9 percent, according to the U.S. Census Bureau. Stevens said he expects the rate to fall further.

Home-Ownership Will Continue to Drop
John McIlwain, a senior fellow for housing policy at the Urban Land Institute in Washington, said he expects home ownership rates to eventually drop to as low as 62 percent. The impact of the pending revamp of the housing finance system on borrowers is clearer than for lenders, whose business model will likely have to change.

According to Guy Cecala, publisher of Inside Mortgage Finance, although the volume of lending has gone down, banks have been earning somewhat higher profits from mortgage originations. That’s because so many mortgage lenders collapsed during the crisis that those who survived gained market share.

For instance, the two largest mortgage lenders, Wells Fargo & Co. and Bank of America Corp., controlled 46 percent of the market in the first three quarters of last year, Cecala said, compared with 28 percent in 2008.

Market Consolidation
Cecala said that banks used to lose, on average, as much as $2,000 per mortgage origination and earprofits from servicing them. Today, he said, because of less competition, they earn as much as $1,000 per mortgage origination. Under some reform scenarios, the entire mortgage financing system could be privatized, which would upend banks’ business model for mortgages, with unknown impacts on their profits.

Currently, most mortgages are originated by banks then guaranteed by the Federal Housing Administration or purchased by Fannie Mae and Freddie Mac, known as government-sponsored enterprises. Fannie and Freddie then package the loans into mortgage-backed securities and sell them to investors.

Because banks don’t have to hold many loans on their books for long, securitization has greatly increased the volume of loans banks issue. It also reduced costs, because the risk of the loan was passed on to investors and the government.

Price of Safety
Joseph Pigg, senior counsel at the American Bankers Association in Washington, said that without a government guarantee, banks would be unlikely to keep offering traditional 30-year mortgages. “You’re funding a long-term loan with short-term money,” Pigg said. “If you stick with that product there is a stronger need for government involvement. There is a price of safety but that’s the way markets work,” he said.

Laurie Goodman, senior managing director for research at Amherst Securities Group LP, said that in a privatized market, investors in mortgage-backed securities would likely demand a higher yield to compensate for the added risk. That would also translate into higher retail borrowing rates.

“Some investors might pull out of the market entirely because of that risk,” said Goodman, whose Austin, Texas-based firm is a broker-dealer for mortgage-backed securities.

New Fees
Fannie Mae and Freddie Mac, now in government conservatorship, have already instituted tougher mortgage requirements and higher fees. The agencies are imposing “loan- level price adjustments” and “adverse market delivery charges” on many mortgages, which can add about 3 percentage points to the cost of a loan, said Alan Boyce, chief executive of Absalon, a joint venture with the investor George Soros to develop a new housing finance system.

The GSEs’ fees have recently gone even higher, said Brian Wickert, president of Accunet Mortgage in Butler, Wisconsin, especially for borrowers who have second mortgages and want to refinance.

For instance, a borrower with a mortgage equal to 76 percent of a home’s appraised value, and a second mortgage adding another 3 percentage points, to 79 percent -- still below the 80 percent level desired by banks -- and a FICO score of between 700 to 719, would have previously paid $2,000 in fees to the GSEs in a refinancing, Wickert said. Following recent increases, those fees are now around $4,000.

Raising the Bar
Amy Bonitatibus, a Fannie Mae spokeswoman, said the agency adjusts standards and fees in response to market conditions. Higher costs, she said, reflect conditions in the market rather than a desire to boost revenue. “These changes are intended to more accurately reflect changing risks in the housing market,” Bonitatibus said.

Analysts say the higher costs of mortgages are already hampering a recovery of the housing market. Borrowers of mortgages bought by Fannie Mae in the fourth quarter of last year had an average FICO score of 765.6, compared with 737.5 in 2008, said Cecala of Inside Mortgage Finance. “We were way too loose in the past,” said Goodman of Amherst Securities. “The question is, are we going to be too tight to solve the problem that’s been created?”

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Thursday, January 20, 2011

Warren Buffett: Is Real Estate Finally a Good Investment?

Warren Buffett speaking to a group of students...Image via Wikipedia
The housing market still looks pretty bleak: There were a record one million foreclosures last year, home prices are still falling in many regions and the number of "underwater" properties is at a record high. And things don't look much better in other areas of real estate. The number of construction jobs continues to decline, even as other parts of the economy have added jobs. And mortgage rates have moved higher as long-term Treasury yields have backed up during the past few months.

Basically, the real estate market remains a mess. Real estate encompasses a wide range of markets – homes, apartments, hospitals, office buildings, strip malls, dormitories and other properties. But for our purposes, let's focus on residential real estate, or homes. Here are four reasons to think residential real estate might represent a bargain – with one big caveat.

Everyone hates homes
Homes are probably the most hated asset class in the country. That's what happens when a bubble bursts. People avoid thinking about the value of their home. Sellers moan about no offers, buyers gripe about impossible lending requirements. Hatred of an asset is often the precursor to contrarian interest, and being contrarian is at the heart of many investment strategies. To paraphrase Warren Buffett, be fearful when others are greedy and greedy when others are fearful. Mr. Buffett backed that idea when he invested in the stock market in the teeth of the financial crisis in late 2008 and early 2009.

Of course, being contrarian for its own sake isn't wise investing. Gold was hated for years ("dead money") before it recently became an attractive asset class. Still, a lot of smart ideas begin with the question: What does everyone hate?

Smart people are buying real estate
This cohort is led by John Paulson, the hedge-fund manager who made $20 billion betting against the housing bubble. Last fall he said in a speech: "If you don't own a home buy one. If you own one home, buy another one, and if you own two homes buy a third and lend your relatives the money to buy a home."

Why is Mr. Paulson so adamant? Because he believes long-term interest rates are not going to get much lower. They have, in fact, risen since he gave that speech, but they remain remarkably low by historic standards. Low rates and the expectation that home prices will rise is his argument. For his part, Mr. Buffett has predicted the housing market will bottom this year.

Real estate performs well during inflation
There's no inflation these days, but when buying a home one should take a longer view. And the longer view shows that the economy has enjoyed a disinflationary period since the early 1980s. A number of folks think that cycle is slowly reversing itself. If that's the case, then convention would argue for holding assets that do well in an inflationary environment. That includes Treasury Inflation Protected Securities, commodities and real estate. Remember that during the stagflation nightmare of the 1970s, real estate had a strong run.

Inflation isn't a significant issue in the U.S., but it's a growing problem elsewhere. China and India have taken steps to fight inflation, the euro zone is getting flickers of inflation and the U.K. has had oddly higher prices (above 3%) for an extended period of time. If the cycle is slowly turning, real estate makes more sense.

Demand may be coming back
Supply isn't as out of whack as it used to be. At the end of November, home builders reported 197,000 new homes on the market, the lowest level since 1968, according to Yardeni Research. The National Association of Realtors reports that the inventory of existing homes for sale fell 4% to 3.71 million homes, which represents a 9.5-month supply at the current sales pace, down from a 10.5-month supply in October.

Those aren't pretty numbers, of course, but they are moving in the correct direction. And that may be a reason that many home builder stocks, such as KB Home ( KBH: 14.98, +0.21, +1.42% ) , Hovnanian ( HOV: 4.51, -0.15, -3.21% ) , Pulte ( PHA: 24.04, +0.06, +0.25% ) and Toll Brothers ( TOL: 20.70, +0.23, +1.12% ) , have come off their lows in the past several weeks.

It's all comes down to jobs. There are a zillion caveats to any positive home thesis, but the big one is unemployment. If the economy is not creating jobs, the chance of a rebound in housing is diminished. It's hard to buy a home without a job, and folks who aren't working don't want to take long-term risks.

The housing market still looks pretty bleak: There were a record one million foreclosures last year, home prices are still falling in many regions and the number of "underwater" properties is at a record high. The US job market is still struggling and the debate is hot about when it will recover. Optimists see recovery this year. Pessimists see pain for several years ahead. How this X factor gets resolved will say a great deal about whether housing will rebound.

Read more: 4 Reasons to Buy a Home Now -
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Monday, January 17, 2011

Global Inflation Finally Hits Home

NORRIS CITY, IL - OCTOBER 03:  An oil well sit...Image by Getty Images via @daylife
The United Nations food agency (FAO) kicked off 2011 by announcing that December of 2010 saw food prices eclipse the record levels hit during the 2008 food crisis, which triggered riots in Egypt, Cameroon, and Haiti at the time. The current spike in food prices has already caused violent food riots in Algeria, Tunisia, Morocco, Yemen, and Jordan. Food inflation has already hit double digits in China, India and Brazil. It's not hard to see why when you look at how some of the major soft commodities have performed over the last 12 months:

•Corn: + 69%
•Wheat: + 47%
•Soy Beans: + 44%
•Sugar: + 15%
•Coffee: + 65%
•Cotton: + 105%

While these price spikes are causing food and clothing prices to rise, those effects will undoubtedly be exacerbated by the simultaneous rise in energy and raw materials we have seen:

•Oil: + 15% over 12 months and + 30% since the August, 2010 low
•Copper: + 30%

You can see by the chart that commodity prices bottomed in the spring of 2009, just about the same time the stock market regained its footing. There was a bit of a dip in the summer of 2010, but prices took off again after Fed Chairman Ben Bernanke's August of 2010 announcement that QE2 was on the way. Prices have continued higher since then, with the Fed officially announcing QE2 in November of 2010.

It would be easy to blame the food riots in Africa on the Fed's quantitative easing policy. To be clear, it probably has been a factor in the rise of commodities, and asset prices in general. The only asset classes that haven't been boosted are those we really want to rise, such as bonds and U.S. housing prices. Still, there are many other factors that are contributing to food price spikes:

Russian Wheat: Drought in the summer of 2010 damaged the Russian wheat crop.
Canadian Grains: Too much rain last spring and summer in the prairie provinces led to lower quality crops and decreased output.
U.S. Crops: The recently released U.S crop report estimated that corn and soy bean output will be lower than expected.
Australian Floods: The horrific flooding in Australia has damaged many key crops, including wheat. Food prices have been soaring in Australia, with the price of tomatoes rising 20% in one week.
Argentinian Drought: Argentina, a major soy bean producer, has been experiencing dry conditions due to La NiƱa that could put a serious damper on output.
Brazilian Floods: Deadly flooding and mudslides in Brazil have also damaged crops.
Economic Recovery: The recent improvement in economic data has led to speculation that commodity demand will rise, further fueling price appreciation.

While Mr. Bernanke's QE2 program might be inflationary, or even hyperinflationary, you can see that there are plenty of other reasons for commodity prices to be rising. Weather has been a huge factor, and, according to John Mauldin's sources, volcanic activity in Russia's Kamchatka Peninsula may continue to contribute to exaggerated weather patterns, commodity volatility and food price inflation a while longer.

The 2008 Food Crisis
If you look at the left side of the chart above, you'll see the most recent commodity price peak in the summer of 2008. You'll recall that, by that time, the cracks in the U.S. housing and stock markets were already showing, but that commodity prices continued to rise - until they stopped. Remember $140 oil? Do you also recall how it proceeded to fall to $35 in just 6 months? Now the price of oil is already back at $90.

Back in the summer of 2008, as commodity prices were peaking, we saw hoarding of food products like rice, and riots across several countries. But all of a sudden, those types of headlines disappeared. Did the food crisis disappear? Addison Wiggin of The Daily Reckoning, writing about The Food Shock of 2011, thinks not. Still, the riot headlines were replaced by financial crisis/commodity crash headlines for a while.

Of course, the financial crisis caused a collapse in all asset prices, especially commodity prices. That brought down the price of many agricultural commodities as well, relieving some of the pressure on food inflation. But once the market recovery took off in March of 2009, commodities led the way and have once again outperformed many other asset classes - nice for investors, but not so great for poor people who need to feed their families.

The 2011 Food Crisis
If you've been to the grocery store over the past year, you know that food prices have been rising. Personally, our grocery budget increased 10% in 2010 and I added another 6% for 2011. I may have to increase that further in light of the recent acceleration in food costs. How long will this food price spike last and how will it end? Of course, no one knows for sure. There are numerous variables that could affect the course of events:

•Supply Problems: If weather-related supply problems continue, prices will keep rising and those least able to afford it will be hurt the most.
•Financial Influences: As central bankers continue to stoke asset price inflation with easy monetary policy, emerging market economies may be forced to raise rates in order to fight inflation. On the other hand, if another global financial crisis erupts, that would likely send all commodity prices plummeting.
•Demand Acceleration: Increased demand coming from the emerging middle class in developing nations means more mouths to feed with fewer, more expensive food supplies. In addition, our decision to use food to fuel our vehicles isn't looking like such a great idea at the moment. Most folks would rather feed their kids than their car.

Recently, we've been blessed with years of record crop output, so we've been able to meet the increasing demand coming from the growing middle class in developing nations. Analysts like Don Coxe, however, have been warning for years that it wouldn't take much of a disruption for our luck to run out, leaving us to deal with food shortages, price spikes, and the resulting civil unrest. Swings in the above factors one way or another will determine how long the food crisis lasts and how (or if) it will ultimately resolve itself.

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Friday, January 14, 2011

Foreclosure ruling could be setback for banks

Wells Fargo bank in Conrad, Montana with autum...Image via Wikipedia
The highest court in Massachusetts agreed with a lower court ruling that two home foreclosures were invalid and found that lenders Wells Fargo Bank and US Bank had failed to prove they owned the mortgages. Massachusetts' highest court upholds the invalidation of two foreclosures in a case involving mortgage-backed securities, saying Wells Fargo and US Bank failed to prove they owned the mortgages.The case, which dealt with loans that had been pooled into mortgage-backed securities, could be another significant setback for the home lending industry.

"Since this is the first real state supreme court ruling, you can bet that an awful lot of judges will be looking at this case," said Rebel A. Cole, a DePaul University professor of finance and real estate. "This is really going to cause a lot of problems" for mortgage lenders. The two foreclosures were made in the names of Wells Fargo and US Bank. Neither of the banks, however, had written the mortgages. Instead, they were acting as trustees, or financial caretakers, for pools of loans made and serviced by other lenders.

The principles underlying the ruling by the Supreme Judicial Court in Boston may apply in other states, including California, said Walter H. Hackett, a Walnut, Calif., attorney who has represented aggrieved homeowners in mortgage cases.

Such rulings could make it easier for distressed borrowers to obtain loan modifications while mortgage ownership issues are sorted out, Hackett said. But he cautioned homeowners not to interpret the case as a "free house" ruling absolving delinquent borrowers of their debts.

The American Securitization Forum, a trade group for the mortgage securities industry, said the problems with the two mortgages in the case involved improper paperwork but not flawed procedures and suggested the decision would not have widespread effects.

A spokeswoman for US Bank's parent company, US Bancorp, said the court's decision wouldn't affect the company's bottom line because the firm was only the trustee for the pool of loans at issue, not the owner of the mortgage. Both banks said that as trustees they were acting only on behalf of the mortgage-servicing firms in foreclosing on the loans.

The Massachusetts ruling came months after the mortgage industry was rocked by disclosures of widespread "robo-signing" — the practice at big banks of having employees certify in court to facts underlying foreclosures without taking the time to read the supporting paperwork.

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Tuesday, January 11, 2011

Richard Maize Comments on Real Estate Trends

Richard Maize, one of America's most respected businessmen and philanthropists, responds to current indicators for the US real estate market for 2011. He is a respected leader in the mortgage banking real estate industry, and a mentor to young entrepreneurs, has generously supported organizations and causes including the American Cancer Society, Vista Del Mar Child and Family Services, Hurricane Katrina, Los Angeles Police Foundation, USO, Haiti earthquake relief efforts, Israel Flying Aid, Maccabiah Jewish Olympic Games and the Cedars Sinai Board of Governors.

"Here are a few simplicit factors that have an affect in the US real estate market: interest rates - the lower the rate, the more affordable your real estate is to the buyer (or holder) of property. More than any other asset, real estate ownership will almost always carry a mortgage. Lower interest rates also generate money by means of refinancing (both by cash out and lowering payments allowing for more spendable each month because of the lower payments) that activates employment by the banks and lenders and all the acceleratory jobs such as escrow, title, appraisers, etc."

"My opinion for 2011 is that interest rates will raise from its current very low figures. This factor is a negative for the industry. If we are keeping score we are 0 for 1 as to a positive for 2011 US real estate market."

"The economy - the economy both national and international has a major impact on the real estate market. From the lowest economic level buyers to the most wealthy. The low end we are dealing with basic employment (at an almost all time high unemployment rate in some areas). Without gainfully employed, cannot be in the market for a house (at least unlikely)," says Maize.
Picture of the "Gingerbread House" i...Image via Wikipedia

"The other issue for those who had a hard time in their own financial crisis, their credit profile is damaged and will take a number of years to repair itself. What that may equate to is no finance on new cars or new home loans. This could help lead to a stalling economic recovery when the other fundamentals have improved."

"Even those that are employed, they could be overqualified for their position for a salary far less than their value because their profession is not hiring or surviving this recession. Low wages is another factor - no buyers for a new home," says  Maize. "The higher net worth individuals have also reduced their spending limits for a home which will limit the higher end homes sales.

Maize states that national home prices may experience a 3.7 percent year-over-year drop this year, according to the company's 2010 home data index market report - an analysis of the top 50 metro areas. While not as severe as the 4.1 percent year-over-year decline recorded in 2010, price declines are expected to continue as unemployment and real estate owned property levels remain high."

"Housing prices will continue to fall but with more consistency than last year. In 2010, federal incentives offered to home buyers threw the housing market into a tailspin, creating periods of extremes in activity. In 2011, ebb and flow of home prices should be more gradual. People are still spending, says Maize, "but they are limiting what they are spending on." In many cases the spending will be on improvements to make home more comfortable, he said. Others will spend only as needed. If an essential appliance breaks, for example, the replacement will likely need to be a high-performer, with greater value in terms of both pricing and function, Maize said. "It's got to be more for your money."

"So, lets summarize," adds Maize. "The negatives (obviously, this is so simplicit to all the factors that are involved in the price and market improvement) are the upcoming increase in the interest rates and the economy in a whole. The positives are consumer confidence and the prices. I think the first two negatives outweigh the positives and we have a flat outcome in the upcoming year for real estate."

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Monday, January 10, 2011

7 Mortgage Predictions for 2011

SAN FRANCISCO - OCTOBER 21:  Karl Rove, (L) fo...Image by Getty Images via @daylife
Financial experts suggest that borrowers should apply for a new mortgage loan, or refinance their home loan when the time is right for their individual needs, rather than attempt to time the market. While risk takers may be enthusiastic about waiting until the last minute to lock in a low mortgage interest rate, most homeowners and homebuyers prefer to observe general mortgage market trends and focus more intently on their own finances.

Predicting a specific mortgage rate for a particular time is pretty nearly impossible, but real estate market observers have identified a few trends that they anticipate will impact the mortgage market in 2011:

1. Mortgage rates will slowly rise throughout the year
The Mortgage Bankers Association (MBA) anticipates that rates will rise slightly in 2011, hovering around 5 percent and increasing to about 6 percent in 2012. Holden Lewis of Bankrate wrote this past fall that economists had predicted a rise in mortgage rates by the third quarter of 2010. At the end of 2010, mortgage rates began to climb out of the 4 percent range and slightly above 5 percent. While any increase in mortgage rates is unwelcome to homeowners who want to refinance or to buyers, a 5 percent mortgage rate is still historically in the low range of interest rates.

2. Overall demand for mortgages will decrease
The MBA predicts that total mortgage originations for 2011 will decline to less than $1 trillion, driven by subdued economic growth and a lack of consumer confidence.

3. Mortgage refinancing applications will drop
Mortgage refinancing has represented a large portion of all mortgage applications in any given week this year, with the refinancing applications accounting for about 80 percent of all mortgages written this year. The MBA predicts that refinancing activity will drop below 40 percent of mortgages in 2011 and decline further to 26 percent of mortgages in 2012. Not only will rising mortgage rates reduce the demand for refinancing, but the pool of qualified homeowners will shrink. Homeowners who could qualify are likely to have done so in 2010, and others have difficulty obtaining a loan approval because of reduced equity or credit or income challenges.

4. Mortgage applications for a home purchase will become a greater part of the market
The MBA predicts that stabilizing home prices and modest increases in home sales will increase the number of applications for a mortgage for a home purchase.

5. Jumbo loan mortgages will be more attractive
In 2009 and earlier in 2010, mortgage rates for jumbo loans (loans over $417,000 in most housing markets and above $729,750 in high-cost housing markets) were far higher than mortgage rates for conforming loans. The higher rates prevented homeowners from refinancing and kept some purchasers out of the market for more expensive homes. In the Q4 of 2010, mortgage rates on jumbo loans decreased, which will likely spur refinancing applications and purchase applications for the high-end housing market.

6. All-cash purchases will become a larger part of the market
Lawrence Yun, chief economist of the National Association of Realtors, says that all-cash purchases represented about a quarter of all existing home purchases in the last four months of 2010. He anticipates all-cash purchases to continue to represent a significant portion of the market in 2011.

7. The mortgage loan process will remain slow and complex
Holden Lewis at Bankrate says even if the number of loan applications drops, lenders anticipate that the time between application and closing will continue to take as much as 60 days. In fact, many lenders recommend a loan lock of 60, 75 or even 90 days to ensure that the loan process will be complete within the lock period. One issue is simply the new level of documentation and verification that is required for a loan approval. Another issue that slows refinancing applications is the existence of a second mortgage or a home equity line of credit, which must be re-subordinated to the first loan when refinancing. Getting a lender to agree to keep the home equity loan in the second position can be time-consuming.

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Tuesday, January 4, 2011

California Man Wins Lawsuit Against B of A Over Failed Loan Modification

A California man won a judgment in small claims court against Bankof America over a failed loan modification.The Huffington Post reports that David Graham was strung along for three years by the bank after he applied for a loan modification under the Home Affordable Mortgage Program (HAMP), the federal program meant to help homeowners keep their property. Graham said he wouldn't have bothered applying had he not been sent the material without solicitation. He supplied all requested data and sat back to wait to learn if he qualified.
The program requires that the bank turn around the request with a thumbs up or down no later than three months from receipt of all information from the applicant. If qualified, the program is meant to restructure the homeowner's property loan for a period of five years, with the hope that the financial circumstances of the applicant improve.

During that period, which extended for three years in Graham's case, he paid his reduced monthly mortgage payment every month and on time. He spoke to innumerable representatives of Bank of America who all told him to keep paying the reduced amount and hope for the best.

Graham was eventually turned down. He was then told that he faced immediate foreclosure if he didn't pony up the difference between what he paid and what was owed under the original terms of his mortgage. He sued the bank for that precise amount, saying they strung him along in violation of HAMP's requirements, leaving him vulnerable to losing his home. He won $7,595 and is waiting to find out if B of A will appeal.

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Sunday, January 2, 2011

4 Experts Comment: When Will California Real Estate Return to Normal?

Foreclosures in California are still high. Sales of new homes are at historic lows. And millions of homeowners are underwater on their mortgages. So what's the outlook for 2011 and beyond?

Emile Haddad, chief executive of FivePoint Communities Inc., expects home prices to "stabilize" in 2011 but declined to make a specific price prediction. Determining whether the housing market is on steady footing is essential to developers such as Haddad, the former chief investment officer for Lennar Corp. Haddad, along with Lennar, is now part owner of FivePoint, which is managing the development of the Valencia community in Los Angeles County and other high-profile projects. He believes a recovery has yet to take hold in California.

"We are bumping along the bottom," Haddad said. "And that is a good thing, because that is the first thing that you need in order to start seeing a housing recovery. You need to have a period where values are not going down and the trend is moving in a different direction. California's coastal markets will come back once the job market returns, he said, lifting consumer confidence. But California's inland areas are more likely to lag behind, and builders will have to reconsider the kind of product they offer in such places."

"In the Central Valley, values have changed a lot," Haddad said. "You are not going to be able to really have enough depth in the market to sell large, expensive homes, because the ceiling of value is way down." "If you pick on a market like Orange County," he said, "it is still a place that once people feel confident.... I believe people will be out buying homes."

Leslie Appleton-Young, chief economist for the California Assn. of Realtors, predicts home prices will rise 2% in 2011. There are few professionals who would like more to see the housing market bounce back to the heady days of old than Realtors. Real estate agents made a killing when the housing market soared and then took a pounding when it tanked. During the boom years, Appleton-Young said, she espoused the theory that rising prices mattered more than making solid loans. That theory appeared correct as long as values kept rising.

"What happened this time was prices plummeted and everyone was in trouble," she said." These days, the economist sees little chance of the market returning to its previous heights anytime soon. We are in a very slow-moving recovery with prices stabilized at the moderate and low end," Appleton-Young said. "We are still seeing price attrition and price softening at the upper ends of the market. " 2011 will be lackluster, she said, but that does not mean California is not improving."

"We are almost two years into a price recovery. The problem is not to look at 2007 as the normal market that you are moving back up to, because it wasn't a normal market. We are back in an underwriting environment that actually makes sense. "You are seeing prices recovering throughout the state," she added. "It is just going to take time."

Christopher Thornberg, founding principal of Beacon Economics, predicts home prices will remain flat in 2011. Once a senior economist for the UCLA Anderson Forecast, Thornberg was one of the first to predict the housing crash, pointing to prices that were way out of line with what people earned.

In that vein, he views the plunge in home values as its own recovery of sorts "because that is when prices went from stupid-high levels to levels that made sense again," Thornberg said. "Now we are in a post-recovery recovery, if you will. This is not the bust. A bust implies that prices have fallen to levels that are too low. And I would argue that prices today are relatively high. It's interest rates that have given us this degree of affordability, and from that perspective that is why I don't expect prices to come down."

Since helping found Beacon in 2006, Thornberg has become chief economist for state Controller John Chiang and chair of the Controller's Council of Economic Advisors. He serves on the advisory board of New York hedge fund Paulson & Co. He has been a forceful critic of the Obama administration's policy attempts to right the market."The administration has tried, through a variety of policy methods, to try and spike the market," he said.

Bruce Norris, president of Norris Group in Riverside, expects home prices to fall 5% in 2011. The real estate slump has been good to Norris, an investor in foreclosed homes. But he believes the market is being artificially boosted by government programs and is set to fall further this year."We are in an artificial recovery," Norris said. "It's government controlled and manipulated. We have extremely favorable interest rates that we really should not have, based on our debt. We have supported real estate with tax rebates, and we have prevented inventory from showing up by allowing people to be two and three years behind on their mortgages."

"Foreclosed homes, in particular, are being kept off the market through loan modification attempts and other policies. You've had a slew of programs trying to prevent inventory from showing up, and that prevents reality from happening," Norris said. "It's definitely standing in the way of the natural process."

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