Is there too much excitement about the recent gains in the housing market? Can the jump in sales figures this past summer truly be sustained?

Some of the nation’s foremost housing experts question some national data and trends and are wary about the number of adjustable-rate mortgages (ARMs) that are scheduled to adjust in the next nine months.

On the surface, the outlook heading into the colder months appears to be looking up, giving real estate salespeople and industry service providers a small measure of relief and confidence. The National Association of Realtors’ Pending Home Sales Index in September was up for the eighth month in a row, reaching its highest level since December 2006.

Another one of the nation’s most popular gauges, the Case-Shiller Home Price Index, which follows home prices in 10 of the nation’s major cities, sharply changed direction between April and July after being down considerably between January and April. The gauge, which can be viewed as a homeowner confidence check, implies that consumers believe home prices will rise significantly in the next 10 years.

One analyst who sees this as problematic is David Lereah, the former NAR chief economist who is now president of Reecon Advisors Inc., a real estate advisory firm located in Washington, D.C.

"These results are surprising since the economy continues to shed jobs on a monthly basis and foreclosures continue to dominate the housing landscape," Lereah said. "The Case-Shiller survey indicates that homebuyer optimism overshadows economic reality. I worry that they are becoming overexuberant once again."

According to the survey, homebuyers believed (on average) that home values would increase 11.2 percent annually for the next 10 years. The median response (half above and half below) was 5 percent. According to Lereah, the numbers are overly optimistic and suggest that homebuyers are convinced that the housing "contraction" is over and it is now a good time to buy.

John Burns, who leads a national real estate consulting firm based in Irvine, Calif., recently returned from the Federal Reserve’s Commercial Real Estate Symposium where analysts from all property sectors shared opinions on the industry. Commercial vacancy rates have been down in most major markets and in several areas around the globe. …CONTINUED

"Prior to the meeting, we had been estimating that banks would not recover 20 percent of the commercial real estate loans outstanding," Burns said. "Now, we feel that the recovery will even be less."

What does the downturn in commercial real estate have to do with the residential market? According to Burns, there is good news and bad news.

The good: As soon as the commercial sector hits bottom, solvent banks will need to dispose of residential assets to concentrate on commercial real estate concerns. This will create bargain land-buying opportunities for builders in the next several months. Builders acquiring land for cheap means the beginning of a recovery.

The bad: Banks with high commercial real estate exposure are unlikely to lend to the residential sector. Many of these banks will be lucky to survive at all.

The biggest unknown lurking around the corner is how home borrowers will handle a rise in payment when their ARM adjusts. A Barclays study indicated that between 2008 and 2012, approximately $312 billion in option-ARM loans will recast to become fully amortizing loans.

The majority of these recasts will come in 2010 and 2011 when $109 billion and $118 billion will recast, respectively. As a result of declining home prices and the negative amortization of these loans, most borrowers resetting in 2010-11 will have loan-to-value ratios in excess of 100 percent.

According to the study, option-ARM borrowers are not in the position to do anything about a higher rate even though it is clear that there will be a problem in making the payment. These borrowers chose this loan for a reason: namely, to purchase a home they could not afford with any other loan.

Now that they are already in a home, there is little chance that option ARM borrowers would choose to refinance into a loan that raises their monthly payment. Furthermore, many of these borrowers are locked into these loans due to prepayment penalties.

If you have an adjustable-rate loan scheduled to adjust soon, check your loan documents for the index and any other conditions. Many major loan indices are down, bringing conventional payments down, too. Your initial loan terms will spell out your next steps.

Next week: Buying a foreclosed home? The lender may be more demanding than you think.

Tom Kelly’s book "Cashing In on a Second Home in Mexico: How to Buy, Rent and Profit from Property South of the Border" was written with Mitch Creekmore, senior vice president of Houston-based Stewart International. The book is available in retail stores, on and on


What’s your opinion? Leave your comments below or send a letter to the editor. To contact the writer, click the byline at the top of the story.

Show Comments Hide Comments


Sign up for Inman’s Morning Headlines
What you need to know to start your day with all the latest industry developments
Thank you for subscribing to Morning Headlines.
Back to top
Inman Connect Las Vegas is back and there are only a few presale tickets left! Register today before they're gone.REGISTER×
Log in
If you created your account with Google or Facebook
Don't have an account?
Forgot your password?
No Problem

Simply enter the email address you used to create your account and click "Reset Password". You will receive additional instructions via email.

Forgot your username? If so please contact customer support at (510) 658-9252

Password Reset Confirmation

Password Reset Instructions have been sent to

Subscribe to The Weekender
Get the week's leading headlines delivered straight to your inbox.
Top headlines from around the real estate industry. Breaking news as it happens.
15 stories covering tech, special reports, video and opinion.
Unique features from hacker profiles to portal watch and video interviews.
Unique features from hacker profiles to portal watch and video interviews.
It looks like you’re already a Select Member!
To subscribe to exclusive newsletters, visit your email preferences in the account settings.
Up-to-the-minute news and interviews in your inbox, ticket discounts for Inman events and more
1-Step CheckoutPay with a credit card
By continuing, you agree to Inman’s Terms of Use and Privacy Policy.

You will be charged . Your subscription will automatically renew for on . For more details on our payment terms and how to cancel, click here.

Interested in a group subscription?
Finish setting up your subscription