For most involved in the real estate world 2009 was a year to remember, or in some cases one many hope to soon forget. The year brought with it record foreclosures, a complete erosion of equity, the continued collapse of banking institutions at record pace, and job losses beyond all imagine.
2009 also introduced new terms into the lexicon of real estate, like "extend and pretend" and new acronym's which quickly became household names like TARP, and HAMP. Distressed assets moved beyond the realm of seasoned investors in 2009 to become mainstream fodder for reality television. That's right, short sales have infiltrated the lives of the Housewives of Orange County.
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Yet as we close the book on the first decade in the 21st century, all eyes turn towards the new year wondering what will be in store for the real estate industry in 2010. Although I seem to have left my crystal ball in the office, I can suggest a few items which should influence that outcome.
1. Employment, or lack thereof. Before there is anything else there is income or there is foreclosure. It's that simple. Unless we can do something to fight the tide of rising unemployment and find a way to put more people back to work, there cannot be a housing recovery. In August the California job market was worse than any seen in my father's lifetime. The statewide unemployment rate in November was 12.3 percent. Although, slightly better than October, this factor more than any other will determine the direction of the housing market.
2. HAMP. Loan mods & short sales for the win. It was a commendable effort done for the right reasons, but loan modifications simply are not working. Of 700,000 temporary loan mods completed in the HAMP program, 31,382 became permanent. The two main reasons cited for their failure, unemployment and negative equity. As I mentioned above, unless you have income to pay the mortgage there is no loan mod that can save your home. Second, if your home has lost 30 percent or more in value and you put 0 to 10 percent down, it makes little sense to stay; enter the short sale. An efficient plan that eases the glut of REO's dumped on the market will alleviate downward pressure on home values.
3. Tax Credits, sanctioned down payment assistance. If a seller raises the price of a home and gifts back money to the buyer at closing it's called loan fraud. If a non-profit does it to facilitate that same transaction it's called down payment assistance, also now illegal. If the federal government does it it's called a tax credit. The problem with short term and temporary solutions is, they end bringing with it false hope and turmoil. Home sales in California this fall and winter have been brisk compared to recent standards. The main reasons are incredibly low interest rates and $8,000 in tax credit that new home buyers can use as a down-payment when buying their first home. May 1, 2010 the deal ends.
4. FHA lending standards, tightening the screws. Reduced seller concessions for borrowers (from the current 6 percent max down to 3 percent max), implementation of a minimum FICO score standard, increased minimum down payments (from the current 3.5 percent), and increased mortgage insurance premiums are a prudent move by HUD. However, this will likely mean a smaller pool of buyers in 2010. Particularly, if interest rates start to rise (see #10, hint, hint).
5. Appraisal Standards, coping with HVCC - Fair and unbiased appraisals are a good thing for the banking industry. HVCC and unqualified appraisers are not. The market is flooded with war stories of deals homes that had several offers in one price range and appraisals that somehow came in much lower. To make matters worse, the plan which was intended to save borrowers money more often ends up costing more as duplicate appraisals are ordered at the expense of the homebuyer. HVCC is driving down values, recovery won't happen until that is fixed. You can voice your opinion on HVCC and hear more about it impacts by visiting this site.
6. Reaching the bottom. Just what is a mean reversion? Housing values are typically tied to income. Historically, Americans bought homes with the intention of living in them, paying down their mortgage with an amortized loan, and moving when necessitated by life (eg. growing families, job transfer, etc). The early 2000's created a world of make believe as the economics of home buying found a state of suspended animation. We are now paying for the games we were playing. If you believe in the theory that suggests prices and markets tend to fall back towards their norms, then look for the bottom to be found when 1/3 of the median income supports the median home values for a particular area. If this isn't a bold statement to how locally driven the real estate market is, I don't know what is...
7. Mortgage Delinquencies and the Godfather III - "Just when I thought I was out; they pull me back in." Foreclosure cancellations are up as short sales and loan mods have saved some delinquent borrowers from the grips of foreclosure. At the same time, new defaults are mounting as more and more borrowers face that same grim reality. It all seems to point back to #1 above. We aren't out of the woods until new defaults begin to subside.
8. High End Foreclosures. How the other half lives (with too much debt). To my point above (#7) mid year 2010 will bring a large number of interest rate resets on Alt-A and Option ARM loans. Many of these loans were given to good credit borrowers with no documentation loans. Most of these loans are secured by higher end homes in the nicer neighborhoods of your town. These borrowers owned companies that are now defunct, held high paying jobs that no longer exist, or simply took advantage of the easy money available by "fudging" on their loan app. Unfortunately, most of these borrowers will not be able to pay their mortgage when they have to pay higher interest rates and/or both principal and interest each month. If these borrowers enter default en masse mid year we could see another dip in pricing.
9. The day of reckoning for the commercial markets. Extend and pretend will ultimately come to an end in 2010. Commercial debt is coming due, vacancy rates are rising and commercial rents are laden with concessions. On the other hand it seems as though every money manager and commercial financier has raised a fund to pursue distressed commercial debt and real estate assets. The efficiency of these pending exchanges will ultimately decide the depths to which the commercial markets will fall. Most experts I've spoken with in the Southern California markets expect to see an uptick in transactions around the second or third quarter. Watch to see who will be first in.
10. The Fed's exit, aka the Bernacke Backstroke. To keep loan rates low, the Fed has been buying Treasury's, mortgage-backed securities, and debt issued by Fannie Mae and Freddie Mac to the tune of $155 billion dollars since early 2007. Unless they step gingerly to exit the markets when the program ends next March, we could see a spike in interest rates and another downdraft in the housing market.
2010 may be a tumultuous year, but one of action. I expect transactional volume to outpace 2009 and the expectations of buyers and sellers should begin to collide. If you are a home buyer, there are incentives I believe make it worth jumping in now. Low interest rates and tax credits should offset any potential and temporary drops in value over the coming months. Investors should continue to see deals that pencil on current income, however remain cautious if your plans are to quickly flip properties. Appreciation will not be your friend.
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