January 17, 2010 in Business

Realtor economist sees ‘fear factor’ going away in ’10

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While most housing analysts believe there will be no double-dip recession, the number of foreclosures will continue to hound the industry in 2010.

“The only guys predicting a double-dip recession are guys who want to make a name for themselves,” said John Tuccillo, national residential consultant and the former chief economist of the National Association of Realtors. “If they can call this one right, everybody will remember them. But, in reality, it will be a long, grinding, slow recovery. Banks are sitting on too much cash now for a double dip, and I don’t think most people see that happening.”

Lawrence Yun, the present NAR economist, expects the $8,000 first-time homebuyer credit extension to continue to stimulate the lower end of the market, influencing the entire housing ladder. As more first-timers move in, others move up.

About 47 percent of all home sales in 2009 involved first-timers, up from 41 percent in 2008 and 36 percent in 2006. Yun believes that number will continue to rise because of an estimated 16 million renter households making enough money to qualify to buy homes. Demand should remain strong next year and restore confidence for all potential buyers.

“I don’t think the fear factor will be at play in 2010,” Yun said. “We’re seeing price stabilization on a month-to-month basis.”

Yun’s numbers show the pool of first-time buyers is 5 million more than in 2000, and thus represents pent-up demand. In his opinion, if the credit continues to have the same impact on demand in 2010, overall house prices will rise 3-5 percent next year and sales will be up “conservatively” 15 percent.

It remains to be seen if the first-time home buyer program – plus the new $6,500 credit for existing homeowners – will generate enough energy to eliminate the fear factor next year. People simply postpone a buying decision if they believe home prices will continue to go down.

The stewing pot is the number of foreclosures heading to the market. Some lenders, deluged with active foreclosures, are way behind with some borrowers who are 16-20 months behind in their payments. These loans, called shadow loans, have yet to hit the market as foreclosures. Yun predicts 2.2 million foreclosures next year; ReMax Real Estate is anticipating approximately 5 million, while another study suggests 7 million.

To compound the foreclosure problem, the loan modification program, or “Mods in a Box,” that puts borrowers into affordable, long-term mortgages while adjusting returns for bankers and investors compared to the return on a foreclosure, has not been as successful as hoped. The latest survey shows more than 40 percent of the loans that were modified have headed back into default.

That statistic comes as no surprise to some economists like Stewart Title’s Ted C. Jones.

“It’s real simple,” Jones said. “If you are a person of such a character and are not making your loan payments prior to the mod, even with the reduction you still will not make your payments.

“Leopards do not change their spots and zebras do not change their stripes.”

The FDIC initiated a systematic and streamlined loan modification program for delinquent primary-residence borrowers at IndyMac Federal Bank. It was hoped that by setting mortgage payments that were both affordable and sustainable, the bank could expect to reduce future defaults, improve the value of the underlying mortgages, and cut servicing costs. The results did not meet expectations.

The outcome of Mods in a Box does not bode well for another new Fannie Mae program. The government-controlled company, through its “Deed for Lease” program, will allow borrowers to transfer ownership to Fannie Mae and sign a one-year lease, with month-to-month extensions after that. According to Jay Ryan, Fannie Mae vice president, the program will “eliminate some of the uncertainty of foreclosure, keep families and tenants in their homes during a transitional period, and help to stabilize neighborhoods and communities.”

Unfortunately, I don’t think Fannie Mae is going to get many takers. I believe that many delinquent property owners have given up on retaining the home but are riding out the whole succession of forebearance, postponement, and rental plans to maximize their income by not paying while residing in the home.

Let’s hope that fear factor is quickly eliminated in 2010. Let’s hope people will regain the confidence – and guts – to make their payments or seek a realistic, honest solution.

Tom Kelly is a former real estate editor for the Seattle Times. His 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 of Stewart International.

Five comments on this story so far. Add yours!

• 

  liarsinnews on January 17 at 10:19 a.m.

  The next shoe to drop is commercial real estate. The Wall Street arrows are pointing in that direction, regardless of what Obama is saying.

• 

  greyhound2 on January 17 at 10:43 a.m.

  Because the baby boomers are moving into retirement, the step-down retirement residences look good and so does the first time home buyer market. The step-up homes in the middle will have a tough go though.

• 

  Albert on January 17 at 11:35 a.m.

  Oh Sir Richard, how well you called that one! You’re too young to remember the Carter disaster when Prime Rate was 21% and commercial property tanked. Downtown New York City had a 50% vacancy factor and that was the best in the nation. Money, Money, Everywhere and now the well has run dry. Greyhound has also nailed it on the head. We tried to sell our house ($425,000) - reduced by 30% and after a full year on the market, with no calls at all, we are still here. Our “aggressive realtor” said if the house was price under $100K, then it would sell and ANY house over $200K will NOT sell - period. Oops..I’ll guess that I will stay until the proverbial “money runs out”..which will not be much longer. Oh fun! Good calls on both ends.

• 

  oneandtwo on January 17 at 1:13 p.m.

  We need to quit making real estate an investment and a tax deduction. Too many people are buying the Glutton houses hoping they will appreciate and concurrently deducting the interest.

  I dont see many people buying the $350K+ houses to keep the market percolating especially when they cant get rid of where they are living now.

  First time home buyers are the only ones unrestrained from having to sell a current property.

  I’m still laughing at the riverfront condos marked at $590k that went for $175K.

  Just where do people think that these $100K/Yr jobs come from? They dont grow on trees.

• 

  Erik_T on January 17 at 3:13 p.m.

  You all make great points, as I appreciate seeing thoughful posts here (much outside the norm as of late…). It costs 200K for a knowledgeable builder to build a 3500-4000sf. home. This home is then marketed at 250k-350k depending on lot size and location.
  The home buyer gets a loan well passed their means, and expects to reap a reward of appreciation within just a few years.
  Historically, this has never been the case (long term).

  Greed plays the role of the greatest evil in our current housing market/economy. It is unfortunate that those whom make 100k-200k as a household income (take-home of 10k a month), will ultimately have the money “run out” due to over purchase beyond their means. This is also directly associated with the afforementioned greed. I also have seen first hand the battle between each of us for “who has the nicest vehicle/yard/house/toys” take precident over being truthful to ourselves regarding living within our means. I have always thought that one should purchase a home that is equal in price to what they make in a years time as a household. As much as I would like to have a newer, more modern home, I also realise that it would stretch me beyond my means. I would also love to have a newer model vehicle, with lower miles and all the amenities. With that being said however, life is uncertain, and always in a state of flux for us all (except for the top 3% of the worlds wealth). I see it as very unfortunate that human nature, and those that feed off of the human nature of others will most likely continue us down this path.