real estate market have long passed. Nevertheless, what's past is prologue: There's a lot going on in the market right now that is likely to have a pretty predictable impact on real estate in 2011. Let's look at how homebuyers can expect to fare next year with these four real estate predictions:
Prices and mortgage rates will stay low in most areas, but will rise in affluent areas and markets experiencing job/population growth. Buyers will have plenty of time to take advantage of low prices, which will stay low next year, except in markets with positive job and population growth.
If you've been watching the housing market bottom out over the past few years, cursing the fact that as soon as prices dropped, down payment requirements ticked upward, stop cursing and start saving. Any fears that you'll quickly be priced out of the market are relatively unfounded, in most areas. High numbers of homes for sale, the continued influx of distressed properties like short sales and foreclosures into the housing market, the overall economy's stagnation and high unemployment, and the probable lack of new government incentives for home buying will all combine to keep the supply/demand imbalance tilted pretty heavily in favor of buyers. That, in turn, will keep prices relatively low, especially compared to their 2006 peak. And when buyer activity is low, the Fed keeps interest rates low, too.
The exceptions? Affluent areas where wealthy households will continue to take advantage of relatively low home prices to buy homes; for example, San Francisco has had a double digit increase in home prices over the last 12 months. High unemployment rates in some of these high-end markets are misleading, as there may be job growth in the sector of high-income jobs requiring skills not possessed by many in the unemployment lines. Also, home prices will stay supported and possibly even creep up in cities that have had job and population growth over the past decade -- including Texas cities like Austin, Houston and San Antonio; Midwestern towns like Oklahoma City and Des Moines; and Salt Lake City, which Newsweek's Joel Kotkin deemed a "New Silicon Valley."
Loan guidelines will tighten up, and down payments and loan costs may rise.
We've all seen lenders tighten up mortgage guidelines over the last few years, requiring bigger down payments and forcing buyers to document their income and assets. With its low 3.5% down payment requirement, loans insured by the Federal Housing Administration (FHA) have skyrocketed in popularity in this post-subprime era, going from about 3% of loans originated pre-bubble to about 30% of loans originated in 2010. Buyers' favoritism of FHA loans will only continue to increase in 2011; a recent study by the Home Buying Institute revealed that 87% of home buyers said they plan to use an FHA loan to finance their purchase, with easier qualifying guidelines being cited as the primary reason for preferring FHA loans to conventional.
The tight debt-to-income ratios and other standards do seem to be working; the National Association of Realtors recently noted that "mortgages that were recently originated show an outstanding performance, even better than during the pre-housing bubble years." As FHA loans look poised to dominate the lending market, the FHA faces two pressing needs: (a) cash, and (b) to ensure that default rates stay very, very low. In fact, this year, Congress considered (but refrained from passing) a bill proposing to boost FHA's bankroll by hiking the down payment requirement up to 5%. The same proposal called for eliminating buyers' ability to have sellers pay their closing costs as part of the deal; in fact, FHA did actually drop the permissible seller-paid closing costs guideline from 6% to 3% in 2010. FHA also raised the costs of mortgage insurance this year. You can expect this trend in tweaking FHA lending guidelines to require buyers to put more of their own skin in the game to continue in 2011.
Condos will become even more difficult to buy. As more condo owners find they can't sell their units and unit values fall, more will fall behind on their dues, walk away or rent their tough-to-sell homes out -- all of which will undoubtedly make it harder to finance and buy a condo in 2011.
Most lenders require that no more than 15% of home-owner's association (HOA) members be 30 days or more behind on their dues, and conventional (non-FHA) loans require at least 25% of the units be owner-occupied. While FHA guidelines allow loans on units in HOAs with up to 49% tenants, the condo complex must be FHA-approved to use an FHA loan to buy a unit.
The days when a quick FHA "spot" approval could be done on a unit-by-unit basis are long gone. Now, the whole complex must be approved before a unit can be bought or refinanced with an FHA loan. HOAs can apply for HUD approval, but it takes 2-3 months to obtain. The expedited, 10-day approval some lenders are authorized to bestow is increasingly hard to get, as lenders don't want to bear the burden of guaranteeing all loans made -- by them or another lender -- based on that approval. Foreclosed condo units tend to both be delinquent on their dues and non-owner occupied, making the problem even worse.
The HOA-related challenges around obtaining either FHA or conventional loan approval has stopped many units from being sold across the country, and that has already started to spiral into declining condo values and even more dues delinquencies and walkaways in condo complexes. And FHA condo HOA approval criteria are set to already get even tighter in 2011! Complexes with high delinquency rates or lots of non-owner occupied foreclosure units won't even qualify for non-FHA loan.
Conservative buying will be the name of the game.
Not using every cent you possess for your down payment. Buying a home with a mortgage payment you can comfortably afford, even if you were approved for more. Negotiating already-good list prices downward and asking the seller to help you buy your interest rate down.
Next year, we'll start to see the aggressive general consumer bargain-seeking that some call "the New Frugality" take expression in buyers who first started saving up for home ownership at the start of the housing crisis, and have scrimped and conserved to buy at post-bubble pricing. We also may see the first wave of post-foreclosure buyers -- former homeowners who lost their homes during the sub-prime implosion around 2007-2008, and are fresh out of the 3-year post-foreclosure waiting period to qualify for an FHA loan.
We'll also see a significant number of buyers who have been sitting on the fence, waiting for the bottom and may have missed it, but believe they can make up for any missed timing opportunity with the right deal. All three of these groups, as well as any other buyers who decide to pull the trigger on buying a home next year, will be looking for low prices, and the sense that they're getting an amazing value for the price.
Tuesday, December 28, 2010
Wednesday, December 22, 2010
Image via WikipediaThe Forecast
Here's a mediocre forecast for you. It's not a double dip or a doomsday story, but it's decidedly lackluster. At this rate of growth, the economy underperforms its potential for . . . as far as the eye can see.
Key motivator of the stagnant view: slow monetary growth. In recent months I commented on the Fed's "quantitative tightening" and why economic growth has been so slow. Second quarter GDP data confirm the slower rate of expansion.
The Good News
The Good News for the Economic Outlook: The Fed will shift gears and stimulate the economy. There's starting to be a recognition at the Fed that slow growth will be prolonged, and that some more easing would not be inflationary. In addition, the Fed board is about to get three new members, who are likely to be more inclined toward stimulus. One, it was pointed out to me, could be an inflation hawk. I replied that I, too, would be an inflation hawk if only I could find some inflation.
The Bad News
The Bad News for the Economic Outlook: Monetary policy takes time. The slow growth of the money supply over the past 12 months will have persistent effects. The new policy will impact the economy with a long time lag. I use 12 months as a very rough rule of thumb. Milton Friedman (happy birthday, by the way) famously observed that the times lags are "long and variable." So I forecast sluggish growth for four quarters, then a small pickup. I think there's the potential for a stronger pickup late in 2011, but the Fed would have to get working on that this month.
Double Dip Recession? Not in my forecast, but the slower economic growth is, the less cushion we have against another downward force. A European debt crisis seems the greatest risk at this time, but there are always risks. We simply do not have much margin for error.
What Actions to Take
What Should a Business Leader Do? Begin with a conservative sales forecast. Then add in some contingency planning for a second recession. You might also want to consider how to manage your business when sales are hard to forecast
- Ten Economic Questions for 2011 (robbiz1978.blogspot.com)
- Slower recovery for economy (lv.com)
- CBI Forecasts See Continuing Slow UK Recovery Through 2011 (forexlive.com)
Monday, December 13, 2010
Authentic Real Estate: Foreclosure Volume Expected to Peak in 2011: "Image via WikipediaNext year could very well be a peak year for foreclosures, says Rick Sharga, a senior vice president at RealtyTrac, an on..."
Image via WikipediaNext year could very well be a peak year for foreclosures, says Rick Sharga, a senior vice president at RealtyTrac, an online marketplace for foreclosure properties. The market is expected to tally about 1.2 million bank repossessions in 2010, up from 900,000 in 2009, he says. "We expect we will top both of those numbers in 2011."
That's partially due to issues the industry has faced with foreclosure processing that began in the fall and delayed a portion of foreclosures from being completed this year, he says. In the so-called robosigning controversy, some lenders halted foreclosures after learning procedures for signing off on foreclosure documents might not be in accordance with the law.
Continued high unemployment also is expected to exacerbate the foreclosure problem in the year ahead, as will upcoming interest-rate resets on adjustable-rate mortgages that will increase monthly payments for some homeowners, Mr. Sharga says.
In the meantime, data on the volume of loan modifications from the Treasury Department indicate that fewer borrowers were being approved for permanent modifications in recent months, says Greg Hebner, chief executive of MOS Group, a loss-mitigation service provider to mortgage lenders and servicers.
What's more, there's a growing feeling that modifying mortgages doesn't get to the heart of the housing crisis: "There is the perception that the answer to this involves trying to get job growth," which will help homeowners pay their loans and enable others to buy homes, said Jay Brinkmann, chief economist for the Mortgage Bankers Association, during a recent conference call with reporters.
For the longer term, however, the outlook for the foreclosure market is better since fewer homeowners are becoming delinquent on their mortgage payments. Thirty-day delinquencies are down 11% since the height of the recession in the first part of 2009, according to Mr. Brinkmann.
High housing inventory, along with high unemployment, will likely add up to continued depressed home prices in the year ahead in many markets, says Nichole Jordan, banking and securities industry practice leader for Grant Thornton, an accounting and business advisory firm.
"Realistically, you're not going to see home prices appreciate next year," says Jason Kopcak, head of whole loans at financial-services firm Cantor Fitzgerald. In fact, many in the industry are expecting prices to fall another 10% next year on a national basis, he says. RealtyTrac's Mr. Sharga says the national decline could be around 5%. Other economists are expecting prices to remain flat.
Next year "is going to be a wash, in terms of any meaningful recovery, and we're looking toward 2012," said Guy Cecala, publisher of Inside Mortgage Finance, during a conference call with reporters. And that's assuming there are no other major problems or delays to contend with, he says.
- More Foreclosures Expected in 2011 (online.wsj.com)
- Amy Hoak's Home Economics: More foreclosures, home-price drops on tap in 2011 (marketwatch.com)
- Peter Dreier: Los Angeles Homeowners Take to the Streets to Protest Foreclosure Abuses (huffingtonpost.com)
Tuesday, December 7, 2010
Image via Wikipedia1. Sell Looser Stocks
This was a tough year for stock investors. With business investment lethargic and hiring gains only in a few key sectors stocks had little to draw from to advance in price. If you purchased stocks this year and have a significant loss from the purchase you may consider selling the stock before year end. If you’re hopeful that a losing investment will recover and you’re thinking of buying it back shortly after selling, be wary of the ‘superficial loss’ rule. A superficial loss occurs when you or your spouse sell an investment to realize the loss only to buy it back within 30 days after the sale date. The CRA can deny a superficial loss and instead add it back to the adjusted cost base (tax cost) of the repurchased security, meaning the benefit of the capital loss can only be obtained when the repurchased security is sold again and not repurchased within 30 days.
2 . If you turned 71 in 2010, it’s time to convert your RRSP
Registered Retirement Savings Plan (RRSP) annuitants who turned 71 in 2010 must convert their RRSPs into either a Registered Retirement Income Fund (RRIF) or a registered annuity on or before December 31, 2010. And if you plan on making any final contributions to your RRSP, you will only have until December 31 to do so as you no longer have the extra sixty-day advantage of delaying until March 1, 2011. If, however, your spouse or partner is under 72, you can continue contributing to a spousal RRSP in his or her name, provided you still have contribution room.
3. Contribute to an RESP
If you have a child or grandchild who has never participated as a beneficiary in a Registered Education Savings Plan (RESP) and who turned 15 sometime in 2010, December 31 is your last chance to contribute at least $2,000 to his or her RESP in order to collect the 20% Canada Education Savings Grant (CESG) for 2010 and create eligibility for CESGs in 2011 and 2012. If you miss the deadline, the child or grandchild will not be eligible for any CESGs in the future.
4. Spread some goodwill
December 31 is the last day to make a donation and get a tax receipt for 2010. Keep in mind that gifting publicly-traded securities, mutual funds or segregated funds with accrued capital gains to a registered charity not only entitles you to a tax receipt for the fair market value of the security or fund being donated but eliminates any capital gains tax as well.
5. Pay off investment expenses and interest
To deduct any investment-related expenses on your 2010 tax return, the amounts must actually be paid by year-end (December 31). Such expenses include interest paid on money borrowed for investing, investment counseling fees for non-registered accounts, professional accounting services for tracking rental or business income and safety deposit box rental fees.
As always, it’s best to discuss all tax-planning strategies with a financial advisor or tax professional to properly determine your eligibility and see how these and other potential tax-savings opportunities might fit into your overall financial plan.