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Housing market still in recovery

Massachusetts’ housing downturn persists, despite attempts to reverse it

By Jenifer B. McKim
Globe Staff / November 20, 2011

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More than six years after the housing downturn began in Massachusetts, home sales are still painfully slow. Values remain 15 percent below their peak. Foreclosures, which slowed as banks wrestled with legal problems, appear to be accelerating again.

As another fall selling season nears its end, the housing market continues to defy efforts to revive it and confound analysts who expected a rebound to be long underway by now. Despite record low interest rates, multibillion-dollar mortgage modification programs, and a host of other efforts, few housing specialists expect any notable improvement in the housing market anytime soon.

Single-family home sales in Massachusetts are unlikely to top 40,000 this year, which would be the lowest number since 1991, when the epic real estate crash of the late 1980s neared its bottom. Even with that crash, a sustained recovery began after four years, and was well underway by year six.

“The housing market is almost as bad as it has ever been absent the Great Recession,’’ said Nicolas Retsinas, a real estate lecturer at Harvard Business School. “We have a situation where the tried and true methods don’t hold water.’’

Several factors are contributing to this relentless housing downturn, specialists say, including an uncertain economy that is undermining confidence and the creation of new households; a complex, lumbering foreclosure process that makes it difficult to clear distressed properties from the market; and changing attitudes about the advantages of home ownership.

The flailing economy and a still elevated unemployment rate - 7.3 percent in Massachusetts - are perhaps the major drags on housing. Young people can’t find jobs, so they are staying with parents, or sharing rentals, rather than venturing out on their own. Families, hit by unemployment or cuts in pay, are struggling to keep up with mortgages, extending foreclosures into rural and suburban areas.

Meanwhile, many potential buyers are too worried about jobs and income to take the risk and responsibility of buying a home.

The housing market and economy appear trapped in a chicken-and-egg conundrum. Traditionally, housing has led state and national economies out of recession. Lower interest rates and home prices combined with a sense of improving conditions to push buyers off the fence, boosting construction, sales of appliances and home products, and a variety of housing related services, such as landscaping.

But right now, consumers are unlikely to have the confidence to buy homes until they see the economy improve significantly, analysts said. But it’s unlikely the economy will improve until the housing market recovers.

“Housing is likely the most powerful factor dragging the economy down at the moment,’’ said Barry Bluestone, dean of the School of Public Policy & Urban Affairs at Northeastern University. “There’s a crisis of confidence at this point and many prospective home buyers are sitting on the sidelines while others cannot meet new heightened credit requirements.’’

The last downturn in Massachusetts occurred between 1988 and 1992 when housing values lost nearly 17 percent, according the S&P/Case-Shiller home price indices. That’s less than the 20 percent fall experienced recently when prices hit bottom in March 2009. Since then, home values have recovered some, but are lately bouncing up and down with no clear direction.

In the 1980s crash, it took nearly 10 years, until spring 1997, for values to regain previous highs.

By 2000, Massachusetts home values started to skyrocket, nearly doubling over the next five years to a median single-family home price of $370,000, according to Warren Group, a Boston company that tracks local real estate.

But as prices outpaced incomes, home sales slowed and values tumbled. The financial crisis and deep recession that followed in 2008 accelerated the plunge, pushing thousands of Massachusetts homeowners into foreclosure.

Three years later, distressed properties continue to weigh down the housing market. Many housing advocates say state and federal governments should do more to persuade lenders to make mortgages more affordable for homeowners who have been squeezed by falling values and financial setbacks.

Following disappointing results of earlier efforts, the Federal Housing Finance Agency recently expanded a program to help homeowners refinance their loans at lower rates even if their mortgages are larger than the values of their homes.

Yet many lenders argue that policies meant to help troubled homeowners have made it harder to seize homes, put the properties on the market, and work through the huge backlog that is helping to depress prices. Troubled homeowners can live for years without paying their mortgages as they fight to avoid foreclosure.

Leading up to property seizure in Massachusetts, the average delinquent homeowner hasn’t paid the mortgage for 779 days - more than two years - according to Lender Processing Services Inc., a Florida-based company that provides mortgage services and research.

Further slowing the process are questions about ownership, prompted by the complex mortgage securitization system in which loans are bundled into securities, sold repeatedly, and divided among thousands of investors. These questions have led to challenges of foreclosure-related practices and court rulings that have clouded the titles of seized properties, making foreclosure sales even more difficult.

Tim Davis, a research consultant for the Massachusetts Housing Partnership, a nonprofit affordable housing organization, worries that these complications could keep struggling neighborhoods in trouble for years, with long vacant foreclosed homes attracting crime and vandals, and further eroding property values in these areas.

“We could have thousands of properties that have unclear titles and they could just sit there,’’ he said. “People will not want to buy properties that have been in foreclosure.’’

Also slowing housing sales are tighter lending guidelines that have prevented some buyers from qualifying for loans, said Laurie Cadigan, president of the Massachusetts Association of Realtors. Cadigan is among the many real estate agents and housing advocates who believe lenders have gone too far to correct the freewheeling policies that led to the crash.

“People who have a good job, good credit, and a strong history of making payments should not be going through what they are going through to get a loan,’’ Cadigan said.

Housing values appear to be stabilizing. But local economists worry it could be at least several more years before the market really starts to move again. Karl E. Case, cofounder of the Case-Shiller index, said the overall market will not pick up until the glut of foreclosures is cleared. He also believes the housing market and economy are linked - one won’t improve without the other.

“We are sitting on a knife edge,’’ he said. “I’m among the brainless optimists to think we could see it turn within the next couple years,’’ with prices and sales heading back up. “Then there is the possibility it could go the other way.’’

Jenifer B. McKim can be reached at jmckim@globe.com.