An Awful 2011 Could Crush The Middle Class Dream Of Home Ownership

The 2010 residential real estate market was a fetid stew of foreclosed homes, short sales, falling home prices and massive shadow inventory topped off with bad corporate behaviour by the lending institutions and anemic government programs designed to help troubled borrowers.

But one man’s poison may be another man’s medicine. Low interest rates, reduced home prices and the new homeowner tax credit meant some buyers were able to purchase homes that even two years ago would have been well beyond their economic reach.

Cash buyers too, did well this year, outcompeting traditional buyers on short sale and foreclosed properties because they had no financing contingencies and could forego appraisals and home inspections.

For the average Joe however, the market conditions had a negative impact on personal economic health, and many of these conditions will continue to cast a pall on the market in 2011. Our 2010 inheritance includes:

• 11 million homes “underwater”, which is 21.5% of the total number of mortgages nationwide.
• 4.2 million seriously delinquent mortgage holders
• 6 million homes in “shadow inventory”
• 9 months of listed housing inventory at all price points
• 50% fewer first time home buyers compared to from a year ago

With those conditions in mind, what can we expect of the housing market in 2011? Will it be deja vu all over again, to paraphrase the great Yogi Berra, or will job growth and improving capital markets begin to lift us from this all too familiar morass of poor sales numbers and depressed home values?

My predictions for residential real estate in 2011 are as follows:

1. Home prices will show a 3-7% decline, nationally in 2011.

Keep in mind that this projected decline would be even steeper without the 2009 modifications to the Financial Accounting Standards Board (FASB) rules which allow banks to defer reporting losses on foreclosed homes until the bank takes title. The banks gain several advantages in drawing out the foreclosure process instead of expeditiously completing it. The biggest and most obvious advantage is that banks do not have to report the losses on their balance sheets until the transfer of title. If they don’t report the loss then they also do not have to include the loan amount in the calculation for determining their required capital reserve. Second, banks are strategically holding properties off the market in hopes that property values will improve. This strategy will backfire if property values continue to decline. Third, the banks are not obligated to pay property taxes or HOA fees until they take title; and forth, allowing the delinquent borrower to remain in the home offers some security that the property will not be vandalised or stripped prior to the bank taking title. These factors make it economically advantageous for lien holders not to rush the foreclosure process. Lastly, many banks simply do not have the trained personnel available to manage the 80,000 plus foreclosures per month taking place nationwide. The large shadow inventory has a net effect of artificially supporting housing prices and thus lengthening the duration of unstable marketing conditions.

It’s worthy of note that housing construction remains very low by historical standards and this along with the bank’s manipulation of the market will help support home prices in 2011. Without significant improvement in the economy however, including strong job growth, even these measures will not be sufficient to create the conditions necessary for banks to sell off all of their real estate owned properties without causing continued declines in home prices.

2. Mortgage rates will increase to the 5% range in 2011.

I see mortgage rates remaining below 6% for most of 2011 but leaving the low 4 per cent range to move into 4.875 to 5.375% range, with a possibility of breaking above 6% for short periods.

The end of 2010 saw a rise in rates despite QE2, the Federal Reserve plan to buy back 600 billion dollars in Treasury bonds. Quantitative easing will have little effect on mortgage interest rates which will continue to bounce along in an upward direction with rates between the high 4 and low 5% range over the course of the year. These rates are still very good historically so qualified buyers will continue to have the opportunity to take advantage of the unusual combination of low rates plus low home prices if they dare. As in 2010, however, I predict potential buyers will remain cautious; Concerns over layoffs, hiring and salary freezes and expectations of further declines of home prices as well as the incremental increases in mortgage interest rates will keep many qualified buyers from entering the market.

Consequences of an unstable market.

The longer term consequences of an unstable residential real estate market may be more serious than just the destruction of individual wealth. The ideal of middle class home ownership may be at stake. The census bureau reported a 7% decline in national rental vacancy rates in 2010, along with an overall decline 0.7% in home ownership rates compared to a year ago. There were fewer “organic” buyers, more renters and more investment buyers in the market in 2010 and I expect this trend to continue into 2011. Are we at the beginning of a sociological movement away from middle class homeownership and towards a cultural split between the investment property landlords and their renters both of whom may have less personal investment in neighbourhood security, local schools and shared public facilities compared to primary homeowners?

It is still far too early to tell if the US market is undergoing a systemic change or will eventually return to what we would recognise as a normal market. I can predict with some confidence however that the pain is not over. 2011 will bring more foreclosures, higher interest rates, declining home prices and slow sales due to lack qualified buyers and lack of confidence among those who are qualified.

Logan Mohtashami is a senior loan officer in his family run Mortgage Company, AMC Lending Group, which has been providing mortgage services for California residents since 1988.

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