Real estate in Southeast offers hope but no guarantee

ATLANTA -- Don’t expect the once-reliable real estate market to return to drive the economic engine of the Southeast, experts say.


Broker Sean Hess, for example, says he recognized the problem early on when the number of available properties grew to nearly three times the normal level, and the stunning real-estate crash that followed in 2005 confirmed his intuition.

The crash was a blow not only to the Florida market where he’s worked for a couple of decades but eventually radiated into Georgia, South Carolina and the rest of the Southeast at a time when similar siesmic shockwaves were shooting out from California, Nevada and other boom markets.

Today, Hess hopes his professional sense of the market is just as accurate.

“We’ve pretty much worked it all out in Florida over the last six years,” he said during a lunch last week with the head of the real estate division at the Federal Reserve Bank of Atlanta.

He and colleagues from the region were at the bank for a daylong conference to share their insights with the monetary regulators who recognize the critical role real estate plays in the Southeast’s economy.

Others at the conference were more skeptical.

“We’ve witnessed over the last few years, especially in the ... Southeast ... some pretty severe stress in both the residential and commercial real estate markets,” said Dennis Lockhart, the bank president. “That stress spilled over inside financial institutions and in the overall health of the economy of the Southeast. The recovery has been slower in the region, and a lot of that has been connected to the recovery in the real estate markets.”

It hasn’t always been so.

From the 1950s, the South benefited from a steady influx of new residents as the availability of air conditioning, cheap land, labor and utilities and the interstate highway system made it attractive for companies to locate operations below the Mason-Dixon Line.

Even after those manufacturing plants -- such as textiles and paper -- later abandoned the South for cheaper land and labor off-shore, the population tide continued to fuel the region’s economy.

Now, that fuel line has clogged up, said Robert Sumichrast, the dean of the Terry College of Business at the University of Georgia.

“Most of you came of age during a time when Georgia regularly outperformed the nation by huge margins,” he said.

The governors in Georgia, Florida and South Carolina are developing new efforts to lure business to their states and are expected to push such efforts when legislatures convene next month.

Revving up the real-estate market may be harder. That’s because people who might want to follow earlier generations in moving to the South won’t if they can’t sell their homes first. Economists use the term “mobility” to describe the problem.

More than 5.5 million families owe more on their mortgages than their homes are now worth, according to figures from CoreLogic, a data-collection service. Another 22 million Americans don’t have enough equity in their homes to qualify for a mortgage to buy a new home even if they wanted to move South. Combined, the numbers show half of all homeowners are frozen in place, accounting for 71 million people.

At the current, annual appreciation rate of 2 percent, it will take seven more years for the typical household to dig out of its hole, according to CoreLogic’s chief economist, Mark Fleming.

The average regional real-estate recession takes 10 years to fully recover, and the average national real-estate recession takes 12-15 years.

One of the most discussed policy options for the real-estate industry is assistance for those so-called underwater mortgages, either by adjusting their payments or reducing what they owe.

Recent figures show that payment reduction doesn’t shrink the default rate. That’s because the improved cash flow still doesn’t leave borrowers with any expectation that they’ll ever break even on their homes. So they adopt the mind-set of renters with no hesitation to walk away, notes Fleming.

On the other hand, reducing the balance owed does give them hope, he said.

The experience of Ocwen Financial Corp., which services subprime mortgages, is that only 3 percent default. It only offers a reduction to those already in danger of default home values 150 percent 200 percent below the mortgage balance. Ocwen writes off enough of the balance to give the homeowner 5 percent positive equity.

Other mortgage companies have been reluctant to forgive any debt because they say their agreement with the investors who loaned the money prohibits it, according to Steven Nesmith, Ocwen’s senior vice president and assistant general counsel.

Ocwen takes the opposite view, that it has a responsibility to the investors to maximize their return by preventing a foreclosure.

“We believe there is clearly an obligation among mortgage servicers and banks to actually engage in a mortgage-reduction program,” he said. “Why? There is a greater net cash flow to the investors in implementing a mortgage-reduction program versus going into foreclosure.”

In other words, some money is better than none.

Nevertheless, Nesmith acknowledges that many of Ocwen’s investors oppose reducing the mortgages.

Congress is likely to consider legislation next year allowing federal mortgage-backing agencies to permit mortgage reduction, but it will be a big battle.

Making mortgage reduction available to all borrowers may limit foreclosures, but it won’t improve mobility, according to Paul Willen, a senior economist at the Federal Reserve Bank of Boston.

And that leads back to Sumichrast’s recommendation that residents of the South get used to less real-estate activity and find new ways to fuel the regional economy.

“Going forward, Georgia is unlikely to substantially outperform the nation unless we change our economic-development strategy,” he said.