While those of us working in the real estate industry would love to believe otherwise, there are many reasons why the real estate market will not make a rebound any time soon. The following lists the four major predictions facing the 2011 real estate market:
Interest rates must go up
Interest rates have been historically low for some time now and will have to rise. The price of real estate and interest rates sit on opposite sides of a seesaw and when rates rise, the price of real estate falls. The financial institutions will still make out regardless, for instance, the interest paid back on a $200,000 mortgage at 5% is the same on a $161,000 mortgage at 6%. On both loans the banks make $186,500 on interest off their customer. The real winners here will be the cash investors who have been standing by patiently waiting for prices to hit rock bottom.
A Sea of Foreclosures Awaits
In the year 2011, there will be more waves of adjustable rate mortgages (ARMs) whose interest rates are set to adjust upwards from their low teaser rates. They are the ten year ARMs from 2001, the seven year ARMs from 2004, the five year ARMs from 2006, and a few three year ARMs from 2008. This will be in addition to the four waves of arms that reset in the year 2010 and many other types of creative financing better known today as toxic mortgages. As these loans all go delinquent and sell as foreclosed homes it will continuously pull down the value of real estate no matter what.
Introducing Strategic Default
As if there were not enough problems facing the real estate market, here comes something nobody predicted; strategic default. This new emerging technique has the power to literally bring the economy to its knees. What makes this method so dangerous is that it appeals to all homeowners who owe more than what the house is worth, whether they are delinquent or not. There is two ways to perform this trick, in the first example, a homeowner who owes $250,000 or more on their house in a neighborhood where all the homes are now worth $200,000 or less purchases a similar or an even better home at the cheaper price, and then lets the bank foreclose on the one they owed $250,000. Example two, if they do not qualify for the mortgage to purchase the new home first, they will find a place to rent, let their current house get foreclosed on, and after they rebuild credit in about two years or less, they will purchase a new house at the discounted price. Where renting had once been seen as throwing money out the window, it can now be viewed as a wash or even an investment, for example, $1,000 a month in rent for two years comes to $24,000, however by swapping property through strategic default, they may be able to save upwards of a $100,000 depending on how much prices decline in their area.
Tighter Lending Standards
As more and more homes go into foreclosure, the financial institutions will have no choice but to continue tightening their lending standards. This means they will require even higher credit scores, better credit reports, bigger down payments, higher fees, higher insurance premiums and much more in order to qualify for a mortgage. This is going to further limit the pool of potential homebuyers eliminating any chance for a recovery whatsoever. To make matters worse, all the aforementioned problems facing the real estate market feed off each other and as each individual problem begins to escalate it compounds with the next, creating the potential for a perfect storm, a viscous downward spiral of real estate values.
The Good News
The good news is real estate will once again become affordable, which is key to keeping the American dream from becoming the American nightmare it is today. It will be great to once again see people purchase homes that will not emotionally or financially drain them and their families. People will again be able to afford homes that are large enough to accommodate the size of their families, save for their futures, and start putting money away for retirement again.
Mid Year - At A Glance:
According to RealtyTrac; in June 2010,nationwide 1 out of every 411 homes with an average sales price of $178,000 received foreclosure notices. In January 2010, 1 out of every 409 homes received foreclosure notices. Nationally,from January 2010 to June 2010, a total of 1,961,894 homes received foreclosure notices. This represents a 7 percent increase in filings from June 2009. Thanks to the recently enacted Making Home Affordable program, the loan modification industry is expected to become busier than ever as more foreclosures are expected to occur during the remaining months of 2010. While the economy is not as bad as it was at an earlier point of the recession, there are still concerns over how many foreclosures are still occurring nationwide. The second quarter was a tale of two trends said James J. Saccacio, chief executive officer of RealtyTrac. The pace of properties entering foreclosure slowed as lenders pre-empted or delayed foreclosure proceedings on delinquent properties with more aggressive short sale and loan modification initiatives. Meanwhile the pace of properties completing the foreclosure process through bank repossession quickened as lenders cleared out a backlog of distressed inventory delayed by foreclosure prevention efforts in 2009. The midyear numbers put the nation on pace to exceed 3 million properties with foreclosure filings by the end of the year, and more than 1 million bank repossessions, Saccacio continued. The roller coaster pattern of foreclosure activity over the past 12 months demonstrates that while the foreclosure problem is being managed on the surface, a massive number of distressed properties and underwater loans continue to sit just below the surface, threatening the fragile stability of the housing market.
A recent Mortgage Bankers Association report suggests that there are many people around the United States who are at risk of possibly going into foreclosure. This report indicates that one of out every seven mortgages in the United States is one month or greater behind in payments. This data is important because when a person is behind on payments that person is more likely to end up going into foreclosure or at least falling further behind before resorting to loan modification assistance or selling their home through a short sale or similar method. Consequently, home equity values have declined as well. Home equity is used as a means of helping to make sure that a person will be able to work with a good secured loan to take care of getting a mortgage paid off with each over time. However, the recent financial crisis has caused equity values to decline. Various reports suggest the amount of equity that people in the United States has declined over the years from 13 trillion dollars to approximately 5 trillion dollars. This is a massive decline that will take years to recoup and makes it harder for people to handle their loans and stay on solid financial ground. While the 8,000 home buyer tax credit added a short term boost to home sales nationwide, the program expired in April 2010 and absorption rates have since declined to previous levels. The program was also riddled with fraud and abuse. Some 100,000 of 350,000 credits issued are being investigated by the IRS. In spite of the fraud, the program was viewed as a success by Congress and the real estate industry, just a good step in the right direction by those who wanted to see a larger credit ($15,000) offered to home buyers and a complete waste of taxpayer money by others. The merits of this program can be debated from both ends of the spectrum.
The Road Ahead:
While it is clear some major challenges lay ahead, this is not a permanent situation. As long as The Federal Reserve keeps mortgage rates low in order to attract new and move up home buyers and make investment credit more readily available to investors, inventory should continue to be absorbed at a reasonable rate by the market. Mortgage rates have remained steady, hovering around the 4 percent mark for a 30 year fixed loan. It should also be noted that many banks are keeping foreclosures and distressed properties off the market in hopes of selling them in a stronger economy. This creates shadow inventory and will only prolong the market recovery process because the market cannot absorb what is not made available to it. Some experts believe this oversupplied market will be with us through year 2014, given the existence of shadow inventory and another anticipated wave of foreclosure activity caused by escalating adjustable rate mortgages that cannot be refinanced. Only time will tell
While most of Atlanta metro's real estate markets continued on a downward spiral during 2009 due to high unemployment and anincreasing number of residential foreclosures, there is evidence to suggest that this trend, albeit at a lesser rate, will continue through 1Q 2010.
The statewide unemployment rate rose to 10.2 percent in November 2009, a 3.2 percent increase from the 7 percent noted in November 2008. It's been said that Georgia has lost a total of 370,000 jobs during the current recession, which represents aabout 9 percent of the state's total employment. Georgia's unemployment rate is expected to exceed 11 percent by 2Q 2010. On the bright side, 7 percent of Atlanta's employers expect to hire more employees. By the same token, 79 percent of companies surveyed have stated they do not plan to add any additional personnel to their workforce, and 12 percent have made plans to reduce staff levels in 1Q 2010. As long as a sizable percentage of our population continues to search for stable employment, it will continue to effect their ability to purchase needed goods, services, permanent shelter and prolong Georgia's economic recovery.
According to data base Realty Trac, Atlanta metro had the 39th highest foreclosure rate among American cities during 3Q 2009 with 24,787 foreclosures logged during this period, which is up 13.9 percent over 3Q 2008 and up 4.9 percent from 2Q 2009. During 3Q 2009, roughly one in every 85 homes was experiencing some form of foreclosure, While the Atlanta metro area, which is comprised of 16 separate counties, did experience an increase in home sales due to the 2009 $8,000 homebuyer tax credit (which was extended through April 2010 by the Congress), this only affected the bottom price ranges and did little to stimulate higher priced home sales. Overall, Atlanta average home prices are forecasted to decline another 7.8 percent during 2010.
In short, the 1Q 2010 Atlanta real estate market will continue to favor the purchaser and disfavor the seller due to an overabundance of real estate opportunities and attractive mortgage rates. On the flipside, sellers will continue to be VERY competitive and aggressive with getting their homes 'market ready' and paying close attention to pricing in order to avoid extended days on market and property stigma. In 2010, real estate professionals should continue to think outside the box as we strive to make money in this market. This means reevaluating what we do, why we do it and identifying our fiduciary relationships. We must acknowledge, once and for all, that the plagues that confront us (foreclosures/ high unemployment) will be with us for a while, but with every down market comes golden opportunities awaiting those with a willingness to take advantage of them. To paraphrase German philosopher Frederick Nietzsche: that which does not kill us only makes us stronger.
Sebastian Holmes, CRP, Broker/Owner, HOLMCO Property Solutions, LLC