The decimated housing market may get considerably worse before it gets better, according to housing-industry professionals, who expect foreclosures and home-price declines to continue pressuring the sector through at least the first half of 2010.
The biggest problem will likely be a flood of inventory hitting the market from rising foreclosures, says Bob Curran, a managing director at Fitch Ratings. With a mountain of specialized adjustable-rate mortgages, known as option ARMs and certain Alt-A mortgages, slated to reset over the next 12 to 18 months and unemployment projected to hit 10.5% this year, the number of homeowners defaulting on their mortgages is expected to surge. At least $64 billion in option ARMs will reset in 2010 and another $68 billion in 2011, according to First American CoreLogic, a real estate and mortgage-data company.
At the same time, the government's loan-modification program has been disappointing: the default rate on loans modified after the third quarter of 2008 was 61%, according to a report issued in December by the Office of the Comptroller of the Currency and the Office of Thrift Supervision. All of this is expected to trigger another wave of potential home foreclosures in 2010 and could cause home prices to fall another 5% to 10% before the market stabilizes, according to analysts and economists.
A record 3 million homes received foreclosure notices in 2009, according to Lawrence Yun, chief economist with the National Association of Realtors (NAR). He expects a similar number this year.
John Burns, president of John Burns Real Estate Consulting, is a bit more bearish, predicting foreclosure notices will rise to 3.1 million this year. Foreclosure notices include default notices, auction-sale letters and bank-repossession notices. But those notices may produce a far more damaging result than last year's. "I think 50% more people will lose their homes to a bank this year than they did last year," predicts Burns.
One reason for the expected jump, he says, is that in 2009 many lenders were under pressure from the Obama Administration to postpone repossessions until loan modifications could be made. However, many banks didn't have the staff to assess all their defaulted loans at the time, and he believes many of those will ultimately go into foreclosure in 2010.
Adding to the sector's woes the Federal Reserve has indicated it plans to end a program that's helped keep mortgage rates at attractive levels for home buyers. The Fed program, which involved purchasing up to $1.25 trillion in mortgage-backed securities backed by Fannie and Freddie, will expire on March 31. Rates have already started to inch up in anticipation of the change, with the average 30-year fixed-rate mortgage surpassing the 5% mark in December.
Since the housing market's peak in July 2006, home prices have plunged 30% on average, with prices in some markets, such as Las Vegas, Phoenix and parts of Florida, falling more than 60%. NAR's Yun estimates home-equity losses from the housing meltdown totaled $7 trillion at the end of 2009.
Many housing-industry experts believe pricing will bottom soon, but the bears warn that it will probably be 2013 before the market noticeably rebounds. "The improvement that we're going to see off the bottom will be anemic" for quite some time, says Curran.
"Some markets still have further [down] to go, but we're definitely in the latter innings of the downturn," says David Goldberg, an analyst at UBS. "Even if there's another leg down, we definitely think by [late] 2010 we will have seen the bottom of housing."
The government's decision to extend the $8,000 first-time home-buyer tax credit to mid-2010 and expand the program to include a $6,500 credit for non-first-time home buyers will likely help lure home shoppers into the market. Also, the slide in prices is making homes more affordable. Notes Burns: "If you go to Phoenix, it's $800 a month to buy a brand-new house," making it more affordable than renting.
There have already been mixed signs of stabilization in price and demand. Home prices rose month over month for six consecutive months through October, according to Standard & Poor's Case-Shiller Home Price Composite 10 Index, although prices are still down year over year. However, the most recent figures from NAR indicate that pending sales of existing homes fell 16% in November. Such mixed signals, analysts say, will be the housing market's message for some months to come.