After what it called years of tenuous signals indicating that the housing recovery was underway Standard & Poor's (S&P) Ratings Service say this time it is different.  S&P's Ratings Direct summarized proceedings of Housing and Commercial Real Estate Roundtable it sponsored on April 9 where a number of staff from various S&P divisions discussed the housing recovery..

Why is this time different?  Roundtable participants said the most critical factor is the 6.8 national increase in home prices in 2012.  S&P projects that prices will increase another 8 percent this year.

"Rising prices are a good cure for a lot of headaches," Erkan Erturk, a senior director in S&P's Structured Finance Research Group said.  "Prices also provide a good summary of the broader housing market. 

Erturk said the housing market recovery has positive implications for the economy, consumers, and local governments as sources of tax revenue.  Robust sales, falling if still elevated mortgage delinquency rates and foreclosure sales and increasing residential homebuilding are all key indicators that the sector is rebounding.

"There were a few false recoveries in 2010, driven by tax credits and other government supports," Erturk said.  The housing market had bounced around the bottom for several years, but a recovery began shaping up in late 2011 into 2012.  "2012 was a significant year - the recovery was strong, and the turnaround came faster than we'd anticipated."

Other positive signs include the shadow inventory which is diminishing because of rising home prices which are also pushing about two million homeowners into positive home equity positions.  Still, affordability remains high for would-be-homeowners.

Despite these improving indicators Erturk said a full recovery will require correction of regional and national imbalances such as the existing 40 percent gap between new and existing median home prices.  "In the long run," he said, "we would need to see existing median home prices rise to be consistent with historical 20 percent levels."

Government intervention such as Federal Reserve purchases of mortgage-backed securities (MBS) continue to cause distortions.  "So you could argue if the support disappeared, the market couldn't sustain the recovery," Erturk said.

S&P credit analyst George Skoufis aid the housing recovery has had a powerful effect on homebuilding and multifamily real estate investment trusts (REITS).  He expects, as a member of S&Ps Corporate Ratings/Commodities Group, to take few if any negative ratings actions over the next 12 to 18 months as improving profitability enables homebuilders to strengthen their balance sheets and fund more and more of their growth through operating profits.  They will draw down on their sizable cash balances before supplementing with unsecured revolving credit facilities. 

Skoufis said that builders have already turned to the debt markets to "opportunistically raise debt to fund land purchases and develop investments to meet future growth, resulting in improving - but still elevated - leverage" Many homebuilders, he said, have taken advantage of receptive debt markets and historically low interest rates although in some instances it is possible that rising debt balances could outpace expectations and delay recovery in key credit metrics, affecting ratings.  He expects a 20 to 25 percent volume increase for rated homebuilders in 2013 although availability of land and rising prices for obtaining it could constrain growth.  

Ratings for apartment REITs should stay stable this year with operating performance coming off of 2012 levels.  Apartment occupancy should remain high and growth, while declining, will remain positive at around 4-5 percent.  Expenses are likely to rise so net operating income (NOI) will slow from 7.3 percent in 2012 to 4 to 5 percent.

Vandana Sharma, a director and analytical manager in S&P's Residential MBS (RMBS) group said private label RMBS will increase to 20 billion in 2013 compared to $6 billion in 2011.  "We know the market will rebound, we just don't know how quickly," she said.

Sharma also discussed the ways in which the market is evolving such as large investors or private equity players bidding up the supply of homes and converting them into rentals.  Those mortgages entering RMBS pools are also of higher credit quality than was seen before the downturn although, she said, that could change once the market begins growing again.

According to Larry Witt of S&Ps Tax-Exempt Housing Groups, a steep drop-off has occurred in housing finance authority single family bond issuance since 2008.  The market has been seeking out alternatives such as selling loans to the GSEs or packaging them into GNMA MBS and hindering the HFAs' ability to issue bonds. 

Mikiyon Alexander, also from the Tax-Exempt Housing Group said that there were no AAA affordable housing ratings at the end of 2012 compared to 109 in 2007.  The ratings in that sector were historically guaranteed by bond insurers and carried the rating of the insurance company.  Once the bond insurance industry experienced credit deterioration most insurance ratings were withdrawn and ratings are now based on the financial performance of the property itself. Therefore the rating shifts were more of a reflection of the counterparty and not due to a significant reduction in the performance of the industry as a whole, Alexander said.

Vacancy rates are something we're concerned about in nonsubsidized affordable rental housing, such as with renters who are moving homeownership or more affluent markets, he said.  Subsidized housing, however, has very strong occupancy rates which are expected to continue given current economic conditions.

Sequestration has already had varied effects on the housing market according to Valerie White, another director in the Tax-Exempt Housing Group.  She expressed concern because the bulk of public housing is tied directly to some form of government subsidies and includes operational subsidies, mortgage insurance, loan purchases, and loan securitization as well as subsidies for rent. The effects of sequestration are clear where the government provides subsidies to renters and local housing authorities which will be cut 5 percent from last year's appropriation amount.  .

White said eliminating the mortgage interest deductions "are also a galvanizing topic for the sector."  While the expectation is these cuts won't happen, the very fact they are being debated indicates they could be more seriously considered in the future and "we anticipate it would have a negative impact on the public finance market."