Jan012010

Predictions for 2010

Recap of Past Predictions

First, I wrote Predictions for 2008, and last year I wrote Predictions for 2009. Nothing too bold or surprising either time:misfortune_teller

“Most of the macroeconomic conditions I made in 2008 are still operative, and several of the predictions I made which came true will likely repeat in 2009. These are:

  1. 2008 will see the worst single-year decline in the median house price ever recorded
  2. One or more of our major financial institutions and one or more of our major homebuilders will fail
  3. A severe local recession
  4. I predict we will see many more angry homedebtor’s troll the blog

I do not believe 2009 will see median house prices decline as much as 2008, but I do believe they will drop significantly, particularly in high-end neighborhoods. The low-end neighborhoods are closer to the bottom than to the top, so 30%+ declines in these neighborhoods are not likely. The high end neighborhoods will experience big drops. Most did not drop 30% last year, so they have more room to drop. The unemployment rate is high, and the economy is in recession which will put pressures on home prices. The dreaded ARM problem is not going away, and these loans will start blowing up this year and on through 2011.”

Not much has changed from my review of the situation a year ago. Lenders did manage to avoid dealing with the problem for a full year, so prices did not budge, and we now have a massive shadow inventory.

“However, there is one bright spot for the housing market that will blunt the declines in 2009: ultra-low mortgage interest rates. We will see properties at rental parity in 2009. The low interest rates are going to reduce the cost of borrowing to the point that many properties will reach rental parity this year.”

I got that one right, and

“With the low interest rates, and with the foreclosures resulting from this year’s loan resets being a year away, we are in a good position to see our first bear market rally. This summer, we might see two or three months of sustained appreciation.”

That happened too, and it happened for the reasons described. As I have noted on other occasions, these conditions are not sustainable.

Predictions for 2010

In looking ahead to 2010, I see a number of important factors that will influence the housing market. Many of the issues discussed today will be the focus of future posts.

Mortgage interest rates will increase in 2010

I don’t know how high they will go, but mortgage interest rates will begin their ascent to a (somewhat) natural market. Any stable homeowner who has not refinanced should do it now or forever miss their chance.

Inventory will increase in 2010

Eventually, lenders are going to have to foreclose on properties, kick out the squatters, and resell the houses in the resale market. Inventory is coming; how much of that we will see in 2010 is anyone’s guess, but I believe we will see much more than we saw in 2009.

Affordability will improve as mid to high end properties are released to the market, and prices of the houses of greatest interest to buyers in Irvine should come down because, despite the buyer interest, there are more properties in distress than there are buyers interested in obtaining them.

Properties selling at or below rental parity becomes the norm in 2010.

As I have noted on other occasions, many properties, even in Irvine, are trading at or below rental parity. This will happen more often, and it will happen at higher and higher price points.

Sales volumes will increase in 2010

Despite the rumors of a healthy real estate market, transaction volumes remain 15% below historic norms on a seasonally adjusted basis. Sales volumes will increase due to greater supply, and prices will go down.

Prices in Irvine will fall 2%-5% in 2010

Increasing interest rates will decrease affordability, and increasing supply will force sales onto the market. The combination will cause prices to begin a multi-year slow decline similar to the 1994-1997 period. The price decline will not be orderly, and the relative stability in the median will mask seismic shifts within the market at sales composition changes (more mid to high end properties will sell) and prices of individual properties decline.

Legislators will consider subordinating GSE loans to artificially increase the lending limit to save the Coastal California market.

If the GSEs wanted to raise the funding cap from $729,000 to $1,229,000. They could simply allow their mortgages to be subordinated to a single fixed-rate mortgage up to $500,000, and the GSEs would be insuring their $729,000 mortgage as a second. The interest rate on the first would be even lower than the GSE mortgage—what risk is there? The GSEs would be taking on substantially more risk, but it would allow them to underwrite loans on more expensive properties, save the Coastal California housing market (not), and pass enormous losses on to the US taxpayer.

Don’t be surprised when someone suggests this as a Treasury Department leak and we read it in the MSM. Obviously, I think this is a spectacularly bad idea, but lenders won’t, particularly if they think they can pass losses on to us.

“Assumability” will become the financing buzz word of the next decade

Yesterday I noted that fixed-rate mortgage rates had bottomed. IMO, we are likely to embark on a 20 year cycle of increasing interest rates as we keep one step behind inflation overheating our economy and burning off government debt in a pyre of our devalued currency.  In a rising interest rate environment, there is significant value in a seller’s financing, if a future buyer can assume the loan.

Refinancing and mortgage equity withdrawal will not be part of our economy for the next decade

Increasing interest rates mean refinancing is at an end, and mortgage equity withdrawal will also be curtailed. When prices were rising and debt was getting ever cheaper, mortgage equity withdrawal exploded. In a rising interest rate environment, borrowing costs go up and home prices do not appreciate as much (or in our case any at all), so there is little equity to withdrawal, and the cost of borrowing and spending this money is very high.

The housing ATM is broken until we enter another long-term phase of lower interest rates. The rules have changed, and we are now entering an inflationary world. Get used to it.