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Five Issues For Housing In 2012
Trying to figure out where the housing market is headed in 2012 offers a strong sense of déjà vu: The market feels just as it did at the beginning of 2011, when many pundits optimistically predicted that housing would finally hit bottom. The housing market didn’t deteriorate in 2011, but it didn’t firm up either amid an economic recovery that struggled to find its footing.
So what does 2012 hold? For one, the story will be local. While many housing markets rose together during the boom and fell together during the bust, they’re exiting the downturn at different speeds, and so it’s not very useful to talk about a “national” housing market.
With that caveat in mind, here’s a look at five key issues that will help determine whether prices stabilize and sales improve in the coming year:
1. Confidence and jobs: The housing market badly needs the economy to add more jobs to stimulate demand for home purchases and to prevent mortgage delinquencies from rising. The good news is that with prices down by 30% from their peak and mortgage rates at their lowest recorded levels, housing is more affordable than it has been in decades. But many would-be buyers are worried about buying today if prices are going to be lower tomorrow. Others don’t want to buy a house until they have more evidence that they’re not going to get laid off or see their hours cut back.
2. Foreclosures: Whether home prices hit a floor this year also relies on how banks manage a huge overhang of foreclosed homes that they haven’t yet taken back and resold. Banks and other mortgage investors own around 440,000 foreclosed properties, but there’s another 3.4 million loans in foreclosure or serious delinquency, according to estimates by Barclays Capital. Because banks are faster to cut prices to unload inventory than are mom-and-pop sellers, home values can fall further as the share of distressed sales rises.
This is one by reason why policymakers at the Federal Reserve and elsewhere are talking about converting some of those foreclosed homes into rental properties. Look for some pilot programs where government entities test the concept in 2012.
3. Rents: Apartment rents are rising as vacancy rates drop to levels that are already lower than the low point in 2006 during the previous economic cycle. If low mortgage rates aren’t enough to give urgency to would-be buyers, rent hikes could accelerate buyers’ decisions to take the plunge.
4. Mortgage credit and rates: Federal policymakers have taken extraordinary steps to keep mortgage rates low and federal-backed entities are responsible for backing nearly nine in 10 new mortgages. But it’s still hard for many buyers to get a loan because banks are demanding lots of documentation of borrowers’ incomes, and appraisals are tanking some deals. When appraisals come in below agreed upon sales prices, sellers must drop prices or buyers must put down more cash. Banks will need to put their legacy-loan problems behind them before there’s much easing in lending standards.
Other wildcards remain on the lending and rates front: will the Federal Reserve initiate another round of buying mortgage-backed securities—a step known to some as “quantitative easing”—to lift the economy? Will continued litigation and demands that banks buy back defaulted loans from mortgage titans Fannie Mae and Freddie Mac lead them to be more stingy with mortgage credit? And will other lenders move in to fill that void? Will the government do more to juice up refinancing programs? Will rates rise as the government attempts to draw back private capital by raising the fees that Fannie and Freddie charge to lenders?
5. Regulation: Many analysts don’t expect Congress to make major changes to Fannie Mae and Freddie Mac during the election year, but several major regulatory changes could significantly reshape the future of the lending landscape in 2012. Dodd-Frank Act lending rules that have yet to be spelled out by regulators will influence how banks price loans that are bundled and sold into securities. Another set of rules will determine how banks must satisfy provisions for them to determine that a borrower has the ability to repay a mortgage.
Meanwhile, the regulator that oversees Fannie and Freddie is revamping the way that mortgage companies are paid for collecting loan payments. This could lead to a broader shakeup in the mortgage industry that ultimately influences how much borrowers are charged for mortgages and how banks handle loans that fall into delinquency.
Readers, what issues do you think are most worth watching in the coming year?