At a presentation this morning in North Andover, Lawrence Yun, chief economist for the National Association of Realtors, hailed 2012 as the year of the long-awaited real estate recovery, but cautioned that tight credit underwriting is likely to restrain the market for some time to come. 

Speaking to the North East Association of Realtors in a gathering at Merrimack College in North Andover, Yun said: "It’s been a tough four years. The aftermath of the housing marking crash has been quite a mess."

And while many problems remain, Yun said that the large amount of foreclosures which continue to plague the system are still driven by the poor underwriting  of the boom, and will decline as they work their way through the system.

The effects of the crash are still impacting the markets in other ways, he noted. For example, he said, in many parts of the country, buyers are unable to get condo loans approved because of tight underwriting standards which prevent loans in any building without sufficient reserve funds.

But often reserve funds are below par precisely because of the presence of units in the process of foreclosure, he said.

"The people who are not paying are the banks. They’re the ones who are not paying the reserve fund," he said, because they’re not contributing such payments on REO units.

Over-Cautious Market

Such ironies indicate the market has become over-cautious, Yun suggested. 

"No one wants to experience the bubble in lending ever again. But the pendulum has perhaps swung too far the other way," he said.

Mortgage documentation requirements are too high, he explained. Requiring buyers to provide a 20 percent down payment to obtain a mortgage because of the new rules surrounding the definition of a "qualified residential mortgage" — one which is free of Dodd-Frank rules on risk retention — could potentially cripple the mortgage market, Yun contended.

"History has shown that it’s not the down payment which is important, but really the underwriting standards," he said. Yun pointed  to efforts like the G.I. Bill, which has provided zero down-payment mortgages to millions of returning servicemen with few default problems.

Yun also discussed other lingering effects of the crash on today’s market. With the tightness of credit underwriting, many potential first-time homebuyers cannot obtain loans, although their payment records have generally been solid. Instead, it’s investors who are able to take advantage of the current low interest rate environment, Yun added.

The decline in owner occupancy rates is worrisome, Yun said, because "historically home ownership has been the path to middle-class wealth appreciation."

However, 2012 still marks a turning point in the recovery, according to Yun.

"We are beginning to see a natural, organic recovery without the stimulus — just people deciding it’s a great time to buy," he said. 

Existing inventory is now at normal level (approximately six month’s worth) across the country, while new inventory is still at historic lows. While shadow inventory is still high, it’s down about a quarter from its peak, according to Yun.

He said he expects shadow inventory to continue to decline as a percentage of sales over the next several years.