Last year I (Mike) listed some predictions for real estate in 2012 and very few of them came true. Then I realized you can’t predict a economic model that is not based on supply and demand. The Federal fingerprints are all over the housing market and concentrating on the mortgage industry. However, in 2013 there could be changes in tax laws, expiration of legislative acts, and retooling of several federal housing programs that will change the status quo. To borrow a stock market term, it COULD be the triple witching of housing in 2013. Please keep an eye on the following items.
- Mortgage Forgiveness Debt Relief Act expires on December 31, 2012 for principal residences. Although the Act will probably be extended, it might not exist in it’s current form. Currently, debt forgiveness that results in short sales, foreclosure, and principal reduction is taxable as income, but that provision in the tax law has been suspended by this Act. If this Act is allowed to expire then there will be a complete evaporation of short sales and you see an increase in strategic defaults and REO’s. There will be a lot more squatting as banks will have more homes to foreclose. There have been a couple of news reports that indicate the mortgage forgiveness might be capped at the purchase amount of the home. Therefore, any additional home equity borrowing that occurred beyond this amount that is deficient (not paid back) would be taxed as income.
- Home Mortgage Interest Deduction cap. In fact, it will be a cap on all deductions. There are different figures being thrown around, but I’ve seen $25,000 the most frequently mention. Amazingly, most households file for the standard deduction. A cap on deductions would mostly hit the coastal states and incomes over $125,000. This will have big affect in homes that are valued between $400,000 to $1,100,000 which just happens to be a lot of Orange County. This will lower the amount potential buyers can borrow. It also means that some current homeowners that spend 50% their income on their house will not be able to afford their payments. Again this could lead to more strategic defaults and squatting. NAR and CAR are using their vast lobbying resources to prevent that cap on deductions. It’s estimated that HMID costs the federal government $100 billion and they want to see some of this revenue.
- FHA retooling of it’s fees and it’s credit guidelines. After the bubble burst, FHA was used to fill in the hole left by subprime lending, it is the insurance program that pays claims to lenders/investors when their federally guaranteed loans defaults by borrowers. Fast forward to today and FHA is now looking at a bailout of $150 billion dollars, even with several large insurance premium increases in the past few years. Now, some legislators in Congress are saying enough and want to increase fees, reinstate of the credit standards, and possibly even lower FHA conforming loan limits. All this talk is very preliminary, but congress wants to move fast and a much clearer picyure will emerge about 45 days from now. Its seems that any loans about $400K and above will have higher mortgage insurance fees and these fees will last longer than the current 5 years. The smaller that downpayment the longer the mortgage insurance fees stay on the loan. Again this is another change that will especially impact low downpayment financing in Orange County. This will affect homes in the $400K to $800K range in Orange County and if HUD lowers conforming loan limit even a little it will have a larger impact.
- The Law of Diminishing Returns on low mortgage rates. I have to credit the continuing commenting from Carl Pham, el O, and Matt1138 for educating me on this concept. Mortgage rates are at record lows because federal government purchases vast quantities of Mortgage Backed Securities (MBS) pushing up prices and lowering the yield. They have been creating money and then use it in program called Quantitative Easing (QE). Every round of QE has less affect on mortgage rates yields and a shorter time frame of being effective. So to compensate, every round of QE has grown larger. If the next round, the fifth one, isn’t big enough then mortgage rates might increase. As in the other examples above this reduces purchasing power of the buyer. This is the real X factor next year and no telling what will happen.
I think these are some of the major changes to look for in real estate in 2013. Will all these change occur? Well your guess is good as mine. We are entering a phase of the housing bubble that it’s a quarter-per-quarter evaluation. I don’t want to even guess what will be the major issues in the second half of 2013. And there could be other issue in early 2013 I didn’t even list here.