Thought Leadership | Mortgage | How To & Education
It’s that time of year. You can tell that the holidays are here because the experts are forecasting what housing will look like in the year to come.
Here’s my surefire bet for 2011. It’s a prediction I’ve made before and it’s as true as ever now. If you want to know what the housing market will be like next year, ask the government.
The government’s role in housing is so huge that decisions made in Washington, and our state capitals, over the next twelve months will have more impact on home sales and prices than any other factor. Consider the following.
Mortgage Rates: The Fed appears committed to do whatever it takes to keep interest rates at record low levels. Should they change course, or fail to maintain current rates, expect home prices to fall. The reality is that buyers buy based on the payment they qualify for - not price. As rates rise that payment buys less house. When that happens to one buyer, they get a smaller house. When it happens to all buyers, home prices fall.
Lending Standards: The housing market would have ceased functioning after the credit crisis in September 2008 without the support of government-backed mortgage lending in the form of F.H.A. insured home loans and the government supported enterprises like Fannie Mae and Freddie Mac. Given the increasing call to limit or even eliminate the role these entities play in mortgage lending it is highly unlikely that lending standards will loosen anytime soon. If anything further tightening may be in store. For example, Fannie Mae just increased debt-to-income requirements, and the waiting period after foreclosure. Tighter lending standards result in fewer qualified home buyers leading to lower demand and ultimately lower prices.
Flipping Rules: At the start of the year the Federal Housing Administration temporarily relaxed their anti-flipping rules to allow investors to buy distressed properties, fix them and resell them. This was a critical change for foreclosure auction buyers, who buy homes "wholesale" on the courthouse steps without title insurance, in need of repair, without inspection, for cash, and then clean them up and sell them "retail" to first time home buyers and others who either can't afford the risks or don't have the cash to buy foreclosures at auction. This was a win-win-win as it helped banks unload distressed properties, generated income for investors and Realtors, prevented blight, and created a supply of clean, low cost homes for first time buyers. Unfortunately this waiver is currently set to expire in February 2011. Foreclosure investors have worked around the rule before by focusing on non-FHA borrowers, but that limits available demand.
New Tax Credits or Housing Stimulus: At the moment it seems highly unlikely that we'll see tax credits or other direct housing stimulus in 2011. If anything the tax credits that ended earlier this year likely pulled future demand into 2010, essentially stealing demand from 2011. Home sales slowed substantially after those tax credits ended, and its currently unclear when they will rise without further direct stimulus.
Mortgage Interest Deductibility: While this sacred cow seems unlikely to be slain in 2011, our unprecedented deficits in the federal budget have brought some to call for the end of the mortgage interest tax deduction. Clearly, the removal of this homeownership incentive would be another blow to the housing market.
Property Taxes: Like the federal government, states are also facing unprecedented shortfalls. As they search for dollars to make up for revenue losses, unfunded pension liabilities, and ever ballooning costs, property taxes will continue to be seen as potentially fertile ground from which to harvest tax revenue. This will be especially true in hard-hit California, where Proposition 13 limits annual increases.
Help for Distressed Homeowners: I'm not confident that most troubled borrowers will ever get real help. What they need most is a principal balance reduction sufficient enough to return their underwater homes back into a sensible investment. Unfortunately, the average foreclosure in CA is $150,000 under water on a house that's now worth $250,000. While that lost equity may be recovered over many years thanks to inflation, it’s hard to make a financial case for that being a sensible continued investment. The unfortunate reality is that neither banks nor the government can afford to bail everyone out. Nationally we ran up about $4 trillion in excess mortgage debt during the bubble. Instead expect to continue to see more of the same - major programs that ultimately fail, as they are primarily designed as political theater rather than real help. That said, the government is likely to continue the political theater, which is likely to at least have some psychological impact on the housing market.
Foreclosures and the "Shadow Inventory: "Even before the recent robo-signing controversy, the lack of clarity around the foreclosure process has only created fear, uncertainty, and doubt among buyers; leaving them to wonder, when, if ever, the millions of homes that are either delinquent or in foreclosure will hit the market. Now issues related to robo-signing and other foreclosure and lending practices have led some to call into question the validity of some foreclosures creating fear among buyers that the purchase of their home may later be deemed invalid. While those fears will likely prove unfounded, government handling of the robo-signing controversy and continued intervention in the foreclosure process will play a role in how quickly buyer regains confidence that the market has stabilized.
My wish for 2011: While I'm confident in my bet that government action or inaction will play the dominate role in 2011, my wish is for reasonable housing policies that clearly articulate a comprehensive, realistic, plan for dealing with the millions of homeowners still underwater, while providing a gradual path back to a healthy housing market, ultimately free of government intervention and subsidies.