Dec 04 2009
What can we expect in 2010? And what should I do about it?
What can we expect in 2010? And what should I do about it?
As an active member of the real estate community and as a member of the Board of Directors for the National Association of Realtors and the Illinois Association of Realtors, I am exposed to a plethora of opinions and insights from state and local real estate economists.
Experts and economists like to predict the future……
However, we know that there is no prediction that is certain until it happens – and by then it is history
One principle that all economists agree on is that prices, on anything are controlled by SUPPLY versus DEMAND. From 2000-2006, DEMAND for homes dramatically increased because of relaxed lending practices. Because there was not enough supply to fulfill the DEMAND, home prices skyrocketed an astounding 87%. In the last 3 years there has been far more supply than demand, and home prices have plummeted from from the highs of 2006.
Below are some of the market factors that many feel will have an impact on 2010’s Real Estate markets.
GOOD NEWS:
In the Chicagoland Metropolitan Area, year-over-year home sales were positive for the third consecutive month, up 5.9 percent to 6,862 total home sales (single-family and condominiums) sold in September 2009 compared to 6,477 homes sold in September 2008 with first-time buyers driving the rebound in sales. However, the median home sale price for the Chicagoland PMSA was $199,000 in September 2009, down 10.8 percent from $223,000 in September 2008.
Though there has been increase in number of sales, prices continue to decline because of too much supply. Until the supply and demand for homes gets back into balance, we will continue to see a decline home prices.
DELINQUENCIES, FORECLOSURES AND SHORT SALES:
All experts seem to agree that foreclosures will continue to be a challenge to home prices in 2010. According to RealtyTrac, Illinois delinquencies and foreclosures have continued to rise to a point that in the 3rd quarter 2009 report, Illinois has risen to the number 5 national spot for distressed properties behind California, Florida, Arizona and Nevada. This continues to add more inventory or supply of homes on the market and at lower prices which equates to additional pressure on non-foreclosure home prices.
According to the Mortgage Bankers Association, second quarter 2009 statistics reveal that more than 13.16% of home mortgages in the United States are 30 days or more delinquent or are in some stage in the process of foreclosure. This means that one out of every eight homeowners are now in a distressed position on their mortgages. These startling statistics reflect the reality of today’s housing market and economic downturn. This will take some time to work through the market before we will experience a bottom to real estate prices.
There is a growing opinion that lenders in the future will prefer to work through distressed mortgages with short sales as a first step before proceeding to the foreclosure process. Statistically, it has been found that short sale prices are higher than sale prices of foreclosures and will cost the bank far less.
This is a good thing since home appraisals will have higher short sale prices to use rather than lower foreclosure prices. Distressed homeowners credit scores and ability to buy in the future is impacted far less in the short sale scenario than a foreclosure.
Shadow Inventory:
Shadow inventory is housing inventory that has stayed off the market either because the seller believed that market (and prices) would be better in the spring. In addition, many former sellers became disenchanted with the response they were getting when they went on the market and therefore decided to pull their homes off the market and may be planning to list or relist in Spring 2010.
Zillow.com conducted a “Homeowner Confidence Survey” earlier this year,which asked the question:
“If you saw signs of real estate market turnaround in the next 12 months, how likely would you be to put your home up for sale?” 12% of all homeowners said VERY LIKELY, 8% answered Likely and 12% answered somewhat likely. This equates to a total of 32% of all homeowners would probably put their homes on the market if they felt the market was improving.
The news media has generally moved from a negative position on real estate sales to a positive position. They really only addresses the number of homes sold. They do not spend much time on the fact that most of these homes are low priced foreclosures, short sales and entry level homes for first time homebuyers.
If all or part of these homeowners actually do put their homes on the market, additional inventory or supply will be added to the current or future inventory putting more downward pressure on prices at all levels.
UNEMPLOYMENT (and UNDEREMPLOYMENT):
It’s no secret to any of us that unemployment in Illinois is 10.5%, higher than the National average. According to the Wall street Journal (7/3/09), unemployment has become a major cause of mortgage delinquencies and foreclosures.
This does not address underemployment, which is basically a reduction of income (less hours or a salary cut) without a loss of job. An employee’s hours may be cut and/or they may no longer receive bonuses that they have counted on in the past and they can no longer pay their bills.
In order to revive the housing market, unemployment and underemployment must get back into check. We will not see people upgrade to larger homes or be comfortable buying new homes until they are secure with their jobs.
Negative equity, Refinances and Mortgage Modification Programs:
According to First American CoreLogic (08/09), 22% of Illinois home mortgages are underwater. This means that the homeowner owes more on the property than it can now be sold for on the market. It has gotten to the point that homeowners with high (FICO) scores when they applied for a loan are now 50% more likely to intentionally pull the plug and abandon the mortgage compared with lower-scoring borrowers. (L.A Times 9/19/09).
Many of these homeowners, originally with higher credit scores and substantial down payment cannot refinance because the new appraisal is less than the current value of the mortgage.
The Treasury Assistant Secretary stated in Housing Wire, 09/09/09 that “Even if HAMP (mortgage modification program) is a total success, we should expect millions of foreclosures, as President Obama noted when he launched the program in February”.
Turn Around?
According to the Mortgage Bankers Association as stated in the Housing Wire 5/28/09, “The housing market may not stabilize until first quarter of 2011” after the release of its
National Delinquency Rates.
According to Seeking Alpha, which used data from Moody’s Economy and Fiserv, Illinois prices will not will rebound to 2006 peaks until at least 2018 and possibly not until 2022. Moody’s analyist Celia Chen believes the national price level will not regain 2006 high until 2020. But remember, ,there is no prediction that is certain until it is history.
If I was a MOVE UP Seller who was looking to upgrade and could afford to do so because I had equity in my home, I would take advantage of the low rates and upgrade. You will have to sell for less than 2006 prices, but,you will be able to buy more for much less.
Higher priced homes have had greater percentage price adjustments than mid or lower priced houses but even if the adjustment was the same percentage, you will be financially better off. As an example, a 20% price decline of a $400,000 home is $40,000 but a 20% decline of a $600,000 home is $60,000…or a $20,000 difference.
Remember, we will probably never see these interest rates again in our lifetimes.
If I was a DOWNSIZE Seller who was going to buy something smaller or not buy at all, there are two choices:
1. If I was counting on 2006 prices, I would have to ask myself the question:
“Can I wait until 2020 to sell and make this move?” If the answer is YES, then I would stay.
2. If I cannot wait a number of years for prices to stabilize and to go back up, I would put my home on the market with a very knowledgeable, aggressive Realtor as soon as possible.
I would:
#1- Prepare the home so it showed very well,
#2- Price it very competitively
#3 – Make sure my Realtor promoted it very aggressively.
The prices are likely going to continue a decline through next year so the sooner the better.
If I was a FIRST TIME Homebuyer, I would buy now Again, the rates for a 30 year fixed mortgage will never be this low and the now affordable choices are great.
According to the New York Times, “If prices come down another 10% but interest rates increase by 1% point, the monthly payment would be the same.” Interest rates will not stay this low so the time to take action is NOW.
If I was an investor, I would buy now and hold for 5 to 10 years. The home prices have adjusted to a point that once again, the property can create a positive rental cash flow. There are many foreclosures that are in disrepair that can be purchased at bargain prices and rehabbed. So now is the time for investors.
If I was a DISTRESSED Homeowner, I would speak to my lender immediately and ask if I qualified for a loan modification. There is an online tool that you can use in the privacy of your own home to see if you qualify: MortgageReliefOnline.com. I would stay away from a Loan Modification brokers or companies that make promises for an upfront fee. There are many scams and these companies are being outlawed in many states.
If I did not qualify for a Loan Modification and could not make my payments, I would contact a Realtor that is trained, experienced and knowledgeable in the short sale process. I would stick with a trained and certified Realtor in short sales.A short sale is not a typical real estate transaction. You must be able to qualify for a short sale in order to have your lender consider it so make sure the Realtor qualifies you.
I would NEVER allow myself to go into FORECLOSURE. It is far more damaging to credit scores, can substantially change your timeline to get a future mortgage and can certainly impair your ability to rent a residence.
This is a temporary, but severe setback for all of us.
As Bankrate.com stated in August of 2009, despite all the bad news in the media about homeownership and mortgages, most Americans still believe that buying a home is a great investment for the future.
The Wall Street Journal reported in September, 2009, “Real Estate has always been and always will be the foundation of wealth in this country”.