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Four Housing Issues To Watch in 2011

Posted on January 4, 2011

By Nick Timiraos

Perhaps the biggest question facing the housing market in 2011: Is this the year housing actually hits bottom? Home prices are expected to fall another 5% in 2011, though there are some who say price declines could be much worse. Here’s our list of four issues to keep an eye on in 2011:

1. Jobs: Call it a cop out because it’s so obvious, but without more tax credits to juice sales, the housing market needs job growth. First, who’s going to buy a house when they’re not certain they’ll have a job in six months and when it looks like home prices are likely to fall another 5%? Mortgage rates spent much of 2010 at a level that hadn’t been seen since the Eisenhower administration, but it didn’t do to increase buyer demand. A crummy job market means that more homeowners risk falling behind on their payments, which would add to the supply of lower-priced foreclosed homes–further depressing prices. Foreclosures are already expected to pick up in 2011, though the rising supply could be offset somewhat by very low levels of new home construction. If jobs pick up, demand picks up and many of the other problems facing the housing market can more easily take care of themselves. If it doesn’t, prices will fall further, and more homeowners will fall underwater, or owe more than their homes are worth.

2. Foreclosure delays: In September, some of the nation’s largest banks, including units of Bank of America Corp. and J.P. Morgan Chase & Co., suspended foreclosures due to potentially fraudulent document-handling procedures. Foreclosure filings were down sharply in November, a sign that the foreclosure machinery is proving to be slower to restart than the banks’ initial folks-there’s-nothing-to-see-here guidance. Banks say that foreclosure-document problems are a technical problem and that they haven’t evicted anyone who wasn’t delinquent. But regulators and state prosecutors have launched a series of reviews and Investigations could shed more light on abuses, such as misapplied or excessive fees, by servicers, their attorneys and other third-party vendors. Meanwhile, some real-estate legal analysts have warned that problems may be more severe if loans weren’t properly recorded or transferred during the process of bundling mortgages and selling them as securities. If foreclosures are more difficult and expensive to process, banks and investors could step up bulk sales of loans or foreclosure alternatives such as short sales, where banks approve sales for less than the amount owed.

3. Washington: Next month, the Obama administration is set to issue an initial set of recommendations for how to remake Fannie Mae, Freddie Mac, and the broader mortgage market. Deficit hawks also have their sights set on scaling back the mortgage-interest deduction, though immediate action isn’t expected. Meanwhile, regulators are also writing new rules on provisions outlined in the Dodd-Frank Act that will clarify how banks must retain some of the risk on loans that are bundled and sold off as securities and define what constitutes a “qualified residential mortgage” that is exempt from such rules.

Other questions loom: Will regulators and policy makers get more aggressive about banks’ treatment of second mortgages, which have hindered efforts to modify mortgages or to avoid foreclosures through short sales? Will policy makers (pay particular attention to the states here) take more vigorous measures to slow foreclosures or rework mortgages?

4. Lending standards and rates: The government continues to dominate the mortgage-lending landscape, with more than nine in 10 new loans backed by Fannie Mae, Freddie Mac or government agencies such as the Federal Housing Administration. Policymakers might try to create more room for private lenders to return by allowing expanded conforming loan limits to fall in September. If mortgage rates continue to rise, that could lead buyers to scale back their purchases, putting pressure on home prices. While some analysts have raised red flags over the FHA’s finances and say that loans with 3.5% down payments are leading the agency to take on too much risk, others worry about tighter lending standards that could further pinch demand. Fannie and Freddie are raising fees that could hit borrowers with down payments of less than 25%.

Readers, what other issues are keeping you up at night about the housing market in the year ahead?

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Housing Recovery Stalls

Posted on December 29, 2010

A new bout of declining home prices is threatening to hamper the U.S. recovery, just as consumers and the overall economy have been showing signs of healing.

Home prices across 20 major metropolitan areas fell 1.3% in October from September, the third straight month-over-month drop, according to the S&P/Case-Shiller home-price index released Tuesday. The housing market, which appeared poised for a recovery earlier in the year, now could be heading for a second downward drift.

“This looks like a double-dip [in housing] is pretty much on the way, if not already here,” said David Blitzer, chairman of the Standard & Poor’s index committee.

Somebody who thought last year that it’s going to be straight up from here was wrong.”

Other news in recent weeks, however, has offered hope the economy is on the cusp of strong, sustainable growth. Retail sales returned to levels seen just before the recession started in 2007. Manufacturing continues to expand. U.S. exports are back to where they were just before the financial crisis.

Optimism among heads of small businesses and large corporations is also near pre-recession levels. And tax legislation that includes a one-year payroll-tax cut for most workers has boosted prospects.

Yet the twin forces of jobs and housing remain trouble spots. The labor market has added a million jobs in the past year, but that pace is far too slow to offset an unemployment rate that climbed to 9.8% last month.

Job worries are hampering consumer confidence despite strength in holiday sales and a rising stock market. The Conference Board, a business research group, said Tuesday that its confidence index fell to 52.5 from 54.3 in November, as consumers’ views about job availability worsened.

The index, after rising through May as the economy showed early signs of improvement, now has retreated to its level of a year ago. The percentage of people planning to buy a home is also back to where it was a year ago, erasing improvement seen in early 2010.

U.S. Consumer-Confidence Index Slips

In the Case-Shiller data, all 20 cities in the index posted month-over-month declines in October.

As for year-over-year data, only four areas—Los Angeles, San Diego, San Francisco and Washington, D.C.—showed prices higher than in October 2009. Six markets hit their lowest since prices started falling four years ago, dropping below their spring 2009 levels, when most regions saw prices bottom out. The six were Atlanta, Miami, Seattle, Tampa, Charlotte, N.C., and Portland, Oregon.

Prices in several markets, including Las Vegas and Cleveland, are nearly down to 2000 levels.

The housing index was driven down by factors including the expiration of a federal tax credit for buyers who signed contracts by April 30, which caused demand to fall off.

Prices also were weighed down by a huge inventory of foreclosed homes, which tend to sell at sharply discounted prices.

In recent months, according to the National Association of Realtors, foreclosure and other distressed sales have represented more than 30% of home sales—and more than half in some states, such as Nevada.

Wells Fargo & Co. projects prices will drop 8% more by mid-2011, given high supply. “Demand is still dead in the water,” said Wells economist Sam Bullard.

Prices also face other hurdles: slightly rising mortgage rates, and homeowners who owe more on their houses than they’re worth, and thus may walk away as values dip further.

The owners under pressure include Tasha McLaughlin, a 33-year-old mother of two in Sacramento’s South Natomas neighborhood. She and her husband, Steve, bought their two-bedroom house in 2004 for $256,000, intending to stay about five years. After 11 months of trying to sell it between 2006 and 2007, the family took it off the market.

Everyone is saying we should foreclose or claim bankruptcy, but I have a moral issue with that,” said Mrs. McLaughlin. “The more we try to pay the mortgage and pinch pennies, the more we get punished.”

Now, with a similar home down the block listed for $80,000, the McLaughlins are accepting that they won’t recoup their losses anytime soon. Their interest-only loan is set to increase their current $1,600 monthly payment to $2,200 in seven years. If they were to default on their mortgage and walk away, they calculate that in about the same time, seven years, their credit scores would be stable enough to allow them to buy again elsewhere.
“I am just going to swallow my pride and walk out. I have to,” said Mrs. McLaughlin. “ The market for homes is not going up.”

Housing analysts agree that markets such as Sacramento, Las Vegas and parts of Arizona and Florida are at risk of more declines. “These places relied so heavily on mortgages and real estate for their economy that we’re going to see a two-tiered recovery,” said Chris Mayer, a professor of real estate at Columbia Business School. “Luxury spending is not going on across the country—it’s happening among highly skilled consumers who live in the places that have seen some recovery”.

Homes remain a key part of Americans’ wealth. Households held $6.4 trillion of home equity at the end of the third quarter, alongside $12.2 trillion in stocks and mutual-fund shares, according to Federal Reserve data.
For every dollar decline in housing wealth, consumers reduce spending by about a nickel in the subsequent 18 months, Moody’s Economy.com chief economist Mark Zandi estimates. He cautioned that other factors, such as the stock market’s strength and tax credits, could offset this effect.

“People feel poorer when their houses are going down in value,” said Jack Fitzgerald, chief executive of Fitzgerald Auto Malls, which has a dozen locations along the East Coast. He is seeing many customers who could buy new cars choosing used cars instead, “spending as little as they can.” While sales are improving, he expects them to grow only slowly, given all the consumer uncertainty.

Still, the overall economy’s dependence on housing diminished greatly since the financial crisis, said Ivy Zelman, chief executive of Zelman & Associates, a housing-research firm. ”Consumers have shown us they can still spend even if home prices go down,” she said. But falling home values “put a lid on the recovery and the magnitude of it.”

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