Real estate agents and brokers typically look forward to spring as the season where homebuyers come out in force and sales pick up.
In 2010, the uncertainty created by the financial crisis makes it harder to bank on a seasonal uptick in sales — particularly in markets hit hard by unemployment.
Further complicating matters down the road are three potentially destabilizing events that are expected to occur in a tight timeframe during the spring buying season:
- At the end of March, the Federal Reserve is expected to wind up a $1.25 trillion program that’s kept mortgage rates low.
- The Federal Housing Administration’s announcement that it plans to tighten underwriting standards could take effect as soon as April.
- Congress is expected to allow the newly expanded homebuyer tax credit to expire, closing the door on buyers not under contract by April 30 and closing by June 30.
Economists must rely on a certain amount of guesswork in predicting what impact these changes will have when drawing up their forecasts for 2010. Many expect unemployment won’t peak until next year, and it’s almost certain mortgage rates can only go up from record lows.
But housing was hammered so badly, and for so long, that most forecasters expect housing prices to stabilize and sales to pick up in 2010, even if economic growth doesn’t spring back as fiercely as it usually does in a recovery.
"We are definitely in a recovery now, but this has been such a severe recession — we think the financial crisis and the credit retrenchment that’s occurred means this is going to be a fairly anemic recovery," said Michael Fratantoni, the Mortgage Bankers Association’s vice president of research.
America has moved from a manufacturing to service-based economy, meaning "there’s not as much potential for a snapback" from a recession like the Reagan-era boom of the 1980s, Fratantoni said.
Housing starts, jobs, and the recovery
In their latest economic forecast, MBA economists are projecting that unemployment will stay "stubbornly high for the next several years," Fratantoni said. The MBA predicts the unemployment rate — which was 4.9 percent in the first three months of 2008, and 8.1 percent in the first quarter of 2009 — will peak at 10.3 percent in the first quarter of 2010.
Unemployment is expected to stay in the double digits for all of 2010, gradually declining to 9 percent by the final quarter of 2011. The MBA forecasts the jobless rate will average 9.5 percent for all of 2011, exceeding the 9.3 percent average expected for 2009.
In past recoveries, job growth has been fueled by home construction. But MBA economists, in their mortgage finance forecast, are projecting only a modest rebound in total housing starts.
It will be two years before housing starts surpass the 906,000 mark set in 2008 — a year that had represented a low point in U.S. Census Bureau records dating back to 1959. According to Census Bureau statistics, housing starts hit a record-high 2.07 million in 2005, and has declined in every year since.
The MBA projects housing starts will hit a new low of 557,000 in 2009, before rebounding to 743,000 in 2010 and 1.025 million in 2011 …CONTINUED
That’s in line with predictions by Fannie Mae, which is forecasting 755,000 housing starts in 2010, and the outlook from the National Association of Realtors, which expects 746,000 housing starts. The National Association of Home Builders is even more pessimistic about 2010, projecting 695,000 total housing starts, although NAHB is forecasting 1.04 million starts in 2011.
Fratantoni said there are two factors holding back new housing production: not only will many potential homebuyers have difficulty qualifying for financing, but builders can’t get loans themselves.
"Even if builders wanted to put up new units given the supply overhang we have, they won’t be able to," Fratantoni said. "In some stronger metro markets, you might see some building again, but on a national basis it’s really not going to be the kind of housing recovery we’ve had in the past."
In seven previous downturns, once a recovery takes hold, U.S. gross domestic product (GDP) has grown at an annual rate of 6 percent. This time, economists with the University of California, Los Angeles, Anderson Forecast expect GDP to rebound to a 2.8 percent annual rate in the fourth quarter of 2009, retreat to 2 percent in 2010, and climb to an unspectacular 3 percent in 2011 (see story).
The UCLA Anderson Forecast depends in part on a projection that housing starts will grow by 48 percent next year, to 850,000 — a more optimistic view than many industry groups have offered.
Home prices and sales
Even if homebuilding remains stunted and contributes little to job growth and an economic recovery, that doesn’t mean there won’t be plenty of homes on the market.
FirstAmerican CoreLogic estimates there was a "shadow inventory" of 1.7 million homes at the end of September, up from 1.1 million a year ago. Those are homes that have been repossessed by banks, or with loans 90 days or more past due, that aren’t officially on the market.
The rise in shadow inventory was more than offset by a reduction in the "visible inventory" from 4.7 million in September 2008 to 3.8 million units a year later, FirstAmerican Core Logic said.
But the shadow inventory — along with First American CoreLogic’s estimate that nearly one in four borrowers was underwater in September — constitutes "a significant risk for future home-price stability" in 2010, the company said.
Many experts say price stability is what many buyers and sellers are looking for before they will get off the fence and pull the trigger on a home purchase or list a property for sale.
Price stability will emerge in different markets at different times — some are already there — but First American expects that, taken together, prices in the nation’s 45 largest metropolitan markets will fall another 4.2 percent before bottoming out in March. …CONTINUED
The MBA and National Association of Realtors are both projecting modest increases in median home prices next year. The MBA is forecasting that the median price of existing homes will increase by 1.1 percent, to $173,600 from 2009 to 2010, and that the median price of new homes will grow by 0.85 percent, to $213,300.
Fannie Mae economists expect a slight deterioration in median home prices next year, with the median price for resale homes falling 1.7 percent, to $170,900, and the median price of new homes also falling 1.7 percent, to $209,200. Those declines would be far smaller than the 12.2 percent hit Fannie Mae says median resale home prices took from 2008 and 2009, and the 8.3 percent slide in median new home prices.
"If home prices have already troughed, we could see economic growth as much as one percentage point higher in 2010 than our base outlook," Fannie Mae economists said in summarizing their latest forecast.
Even if prices continue to slide a bit in 2010, Fannie Mae expects sales of new and existing homes to grow by 9.8 percent from 2009 levels, to 5.98 million homes. That’s still well short of the 6.43 million benchmark achieved in 2007, but would be welcome news for real estate agents and brokers.
The MBA is also projecting that sales of new and existing homes will be right around 6 million, while NAR’s more optimistic projections for both new and existing homes produces an estimate of 6.27 million sales.
Tax credit, interest rates and FHA tightening
With the homebuyer tax credit set to expire at the end of April and interest rates expected to rise, "It seems that the first half of the year might be a time to buy homes," Fannie Mae economist Orawin Velz told Inman News. "I think (the tax credit is) going to support growth, at least for the first half of the year."
Breaking their 2010 forecast down to the quarter, Velz and her colleague, Fannie Mae Chief Economist Doug Duncan, predict that home sales will peak at an annual rate of 6.07 million during the second quarter before retreating to an annual pace of 5.94 million during the third quarter. Fannie Mae’s forecast projects home sales will breach the 6 million-a-year rate again in the final quarter of 2010.
Before the expected expiration of the homebuyer tax credit, the Federal Reserve in March 2010 is expected to wind down $1.25 trillion in purchases of mortgage-backed securities (MBS) guaranteed by Fannie Mae, Freddie Mac, and Ginnie Mae. The purchases are credited with keeping mortgage rates low in 2009.
"There’s a risk to consumers that interest rates are likely to rise if the economy is growing and Fed support is withdrawn," Velz said. "If there’s any pullback, we will have a pullback in home sales in the third quarter."
Duncan and Velz see rates on 30-year fixed-rate mortgages rising gradually next year, averaging 4.93 percent during the first quarter and rising to 5.32 percent during the fourth quarter.
The Mortgage Bankers Association forecasts a more abrupt rise in 30-year fixed-rate mortgage rates, from 5.2 percent during the first quarter to 5.7 percent in the fourth. By the final three months of 2011, the MBA expects 30-year fixed-rate mortgages will average 6.2 percent. …CONTINUED
The Fed’s MBS purchases have reduced the "spread," or difference, between mortgage rates and yields on 10-year Treasury notes to an "abnormally low" level, the MBA’s Fratantoni said.
"It’s about 30 basis points below what would be considered normal, and as the Fed tiptoes out of the market, rates will go up at least that much," Fratantoni said. A basis point is one one-hundredth of a percent, so a 30-basis-point increase would mean mortgage rates would go up by 0.3 percent.
The MBA thinks Treasury yields could also be headed up by 50 basis points as they fall out of favor with investors, with a similar impact on MBS and therefore mortgage rates.
There’s also concern that new accounting rules will cause banks to cut back on their MBS purchases next year, and questions about what steps the government might take to get Fannie and Freddie out of conservatorship could also make foreign investors wary of buying their securities, Fratantoni said.
While increasing mortgage rates may put a damper on mortgage refinancings, they will remain low by historical standards and shouldn’t have a big impact on home sales, Velz said.
The MBA projects that mortgage refinancings, which accounted for an estimated 63 percent of $1.96 billion in mortgage lending in 2009, will fall from $1.25 billion in 2009 to $693 billion in 2010 and $591 billion by 2011.
The MBA expects purchase loan originations will rise from $718 billion in 2009 to $804 billion in 2010 and $896 billion in 2011.
Velz said the Obama administration’s recent announcement that it plans to tighten underwriting standards on FHA-backed loans in 2010 was not factored into Fannie Mae’s forecast, "but that can throw a wrench in what’s happening, because they are a significant force in the purchase market."
Housing Secretary Shaun Donovan told lawmakers in December that FHA will increase the amount of upfront cash homebuyers must bring to the table, raise minimum FICO scores for new borrowers, and reduce maximum seller concessions from 6 percent to 3 percent. HUD is also considering raising FHA mortgage insurance premiums, Donovan said.
If HUD rolls out a formal proposal at the end of January, as Federal Housing Commissioner David Stevens has indicated, the new standards could take effect as early as April.
"We’ve been out front in saying we think FHA needs to act" in response to an actuarial report showing claims on FHA’s insurance fund have reduced its capital reserve ratio below a 2 percent statutory minimum established by Congress in 1990, Fratantoni said.
Raising FHA insurance premiums and tightening the "credit box" to reduce the number of eligible borrowers would probably be less disruptive to housing markets than raising minimum downpayment requirements, Fratantoni said.
FHA-backed loans are virtually the only source of funding for low-downpayment borrowers, he said, and the program mostly serves first-time homebuyers.
"That’s absolutely essential to their mission, and we think they could strengthen their capital position through other means" than raising the existing 3.5 percent minimum downpayment requirement, Fratantoni said.
That said, "It’s going to have to be a market where borrowers with clean credit and substantial downpayments are going to have an advantage," Fratantoni said. "We think that is going to continue — and will be one factor preventing a robust rebound."
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