San Diego Housing Market News and Analysis
Ramsey Su's Real Estate Outlook for 2010
Submitted by Rich Toscano on December 24, 2009 - 4:04pm
It wouldn't be a proper Christmas without a little holiday cheer from legendary housing bubble analyst Ramsey Su. So pour yourself a couple buckets of egg nog and read on...
REAL ESTATE OUTLOOK – 2010
by Ramsey Su
These are not predictions. This is a list that deserves full attention in 2010. Not intending to write a book, I am not including references and links.
In my opinion, short sales are the most equitable solution for all parties to share the blame while stimulating the market in a sustainable manner. The timing is perfect for short sales.
For the lender, it minimizes loss severity.
For the borrower, it provides a fast route to recovery by limiting damage to credit scores while repairing household balance sheets with the elimination of the debt and debt service.
For the industry, real estate brokers, mortgage brokers, escrow, title etc., would all benefit from a growing number of transactions.
For the real estate market, it will stabilize prices, determined by supply and demand.
Neighborhoods benefit from not having to be flooded by unsightly unoccupied REOs.
One of the biggest obstacles, the second lien, is being phased out with time. Very few loans originated during 2007 and beyond utilized second liens.
Public policy remains an obstacle, such as the recently introduced HAFA by the Treasury, 43 pages of bureaucratic red tape.
If they want to do something constructive, policy makers should, at no cost to taxpayers, create some safe harbor rules for deficiency judgment resulting from short sales.
Also at no cost to taxpayers, policy makers should assist credit bureaus in setting a standard of the treatment of short sales so that defaulting borrowers can be recycled back to the buyers’ pool as soon as possible.
If short sales increase with a corresponding decrease of completed foreclosures, I think that could be the most bullish signal for 2010.
Similar to short sales, government should stop HAMPering recovery. Give the free market a chance.
HAMP does not work because, more often than not, it is not a good deal for the borrower. A loan modification is basically a lease with option to buy. The break even point is the fair market rent. In other words, if the resulting total housing expense (principal, interest, tax, HOA dues, etc) is equal to the fair market rent, then the modification is a wash for the borrower. For example:
A house with a current value of $300,000 is for rent at $2,000 per month. If the landlord offers the potential tenant an option to purchase the property at $500,000 in exchange for raising the rent to $3,000 per month, is that a good and fair deal? That is exactly the terms of many modifications. The shysters would promote that as helping poor borrowers stay in their homes but are in fact charging them an extra $1000 for the privilege of having their name on a deed instead of a rental agreement.
On the other hand, if the rent (modified payment amount) remains at $2,000 per month or less, then the tenant (borrower) has nothing to lose by taking the option even though it may take many years for the option to be in the money.
Borrowers are beginning to understand “prevent foreclosure” actually means “prevent foreclosure so lenders can minimize loss severity at the expense of the borrowers”. They are starting to realize they have a much better option – walk.
HAMP qualifying cut off date is for loans originated before Jan 1, 2009. Ironically, the loans originated after that date are easier to modify, since the majority are agency loans with no junior liens. Freddie, Fannie and FHA are free to offer anything they wish without having to deal with private investors and junior liens.
Regardless, modifications should remain a non issue in 2010. It will be a lot of noise with not much impact one way or another.
Bernanke claimed that he is easing out of the agency MBS purchases. He had been buying exactly $16 billion per week for the last five weeks. In just over 2 months, we should know if there are agency MBS buyers to replace Bernanke in this all important secondary market and, more importantly, at what rate.
FHFA and FHA should be analyzing the recent loans to determine what percentage of the applications would have been denied if mortgage rates are higher, by each increment.
It is difficult for mortgage rates to remain at current levels when the Feds exit the MBS market. With the bulk of the activity at the low end, any increase in rates would impact affordability sufficient enough to shut off any signs of recovery, forcing the Feds to take further action.
With so much competition from the Treasuries, the probability of mortgage rates increasing is high. We should be able to see where rates are heading no later than February. If mortgage rates rise above 6%, the rate before Fed intervention, 2010 would be a very difficult year.
Fixing Freddie and Fannie (and FHA)
Freddie, Fannie and FHA kept the real estate market alive in 2009 by providing subsidized financing with the help of the Feds and the Treasury. This is not sustainable.
When the GSEs were placed under conservatorship over a year ago, they were given $100 billion of play money, and then raised to $200 billion and there are rumors that it may be increased to $300 billion – each.
The GSEs had not been profitable, are not profitable and have no plan to become profitable in the foreseeable future. Their losses are equivalent to a subsidy for the housing market. How long can this subsidy continue and what are the ramifications when they are removed?
In 2010, the GSEs are supposed to reduce their combined portfolio to $1.7 trillion. If there are no buyers for agency MBS after the Feds exit the market, the GSEs may be forced to increase their portfolio in direct violation of the terms of the conservatorship. The other alternative would be to raise the mortgage rates until buyers for the agency securities can be found.
In 2010, funding for the GSEs can no longer be by the Treasury alone and will require congressional approval.
2010 cannot be business as usual for the GSEs. Are we going to see a good bank/bad bank proposal? Are the GSEs going to be nationalized indefinitely, along with ownership of Citi, GM and AIG? Is there some secret committee working on an exit plan?
I opine that the probability of disruption is very high. The GSEs will not fail, that is a given. However, it is a certainty that the agencies are going to cost the taxpayers a lot of money; the only question is how much.
There are two types of defaults, those resulting from the housing bubble and those resulting from economic conditions such as job loss. They are not mutually exclusive.
Housing bubble defaults have been worked over with multiple rounds of modification attempts and moratoriums. With all the fruitless attempts out of the way, foreclosures should resume in 2010. The defaults caused by economic conditions are starting. With no employment, these loans are very difficult to work out.
In 2009, there were approximately 900k REOs vs about 5.1 million existing home sales (unadjusted). There are 4 to 5 million loans that are 60 days delinquent and beyond. Various estimates for negative equity range from 20% to 30% of mortgages. The sooner the hopelessly under water loans are flushed out, the sooner sustainable recovery can begin.
If there are no new government intervention schemes, REO volume could easily double to over 2 million, which is only a 40% roll rate for the current pool of delinquent loans. The roll rate should be high because most of these delinquencies have exhausted all options.
With so much supply over hang, especially in the “must sell” category, it is hard to imagine that there could be any upward price pressure. There should be some job creation in 2010 but caulkers and census takers are not good home buyers.
Interest rate is at historical lows. Bernanke (if he is still Fed Chairman next year) would have a tough time keeping the rates at this level, not to mention driving it down if further stimulus is needed.
Low end buyers bidding on properties with multiple offers should have a much easier time next year when the REOs hit the market. Higher end properties depend on move-up buyers who are all stuck with an existing home that they cannot or are unwilling to sell.
The best the market can hope for is support for the low end properties due to affordability. As long as the higher end property owners can afford to hang in there, that sector of the market can be frozen indefinitely, allowing time to absorb the price corrections.
In summary, the real estate market faces major hurdles in 2010, starting early in the year with the bench mark 30 fixed rate as the Feds continue to exit the agency MBS market. Foreclosures are temporarily postponed till after the holidays but flood gates should open immediately after the New Year. The massive amounts of government intervention have very little to show for but the policy makers are convinced that the disaster have already been averted while Bernanke is busying himself to accept the Time Magazine award. Not only is there no Plan B, there is no one in charge of coming up with a Plan B. It will be management by panic, similar to Lehman and Bear Stearns if conditions deteriorate.
I will make one prediction for the 2010 government intervention – principal reduction.
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