Recently, I wrote an article outlining the financial benefits of purchasing with today's low rates and tax incentives. Since then, I've had a guilt complex because there's another combination of market factors that have been haunting me. I don't see how home values aren't going to experience a decrease, albeit a slight one, late this year.
Artificially low interest rates and tax incentives have created synthetic demand for home purchases where prior market-based demand was anemic. Nationwide, this has largely contributed to a decline in the rate of home value decreases, value stabilization or in some cases appreciation. But let's look into a 2010 crystal ball for a moment:
1. March - Fed's MBS purchase program ends in March driving rates up and some buyers away.
2. March - Rates near or exceed 5.5% according to MBA and NAR, an important benchmark which could drive other buyers away.
3. April - Prime, Alt-A and Option ARM resets spike and increase through the remainder of the year putting pressure on mortgage default rates not seen since 2007 when unemployment was under 5%. This has dramatic inventory implications late in the year.
4. April - Homebuyer tax credit terminates april 30th which will drive buyers away.
5. May - the short sale process becomes streamlined under HAFA. With 23% of homeowners upside down on their home, this market will explode driving inventory up.
6. June 1, rates near 6% according to MBA & Freddie Mac and are projected to stay there through the remainder of the year and this will drive buyers away.
2010 X- Factors:
• The Fed has been buying approximately 20 billion in MBS securities PER WEEK! Will anyone step in if home values go back down? If they don't, rates will spike beyond projections. If the Fed has to step back in, we might find ourselves printing money, diluting the dollar and driving oil prices up to those fearful numbers they were at pre-recession.
• Commercial Mortgage Backed Securities defaults increase sucking liquidity out of the lending market, possibly warranting government assistance and extending the choke hold on small business lending (extending the high unemployment number).
• Dramatic FHA guideline changes affecting low down payment transactions and increasing the cost of FHA financing
• FHA underwriting turnaround times extend. Under the new net worth requirements, 489 FHA approved loan correspondents will lose their status, 719 will remain and all formerly non-approved companies will be able to do FHA loans (subject to investor approval). The remaining FHA Mortgagees won't have adequate staff to underwrite FHA loan volume in a reasonable period of time. The more the gears of the mortgage industry refuse to turn, the fewer closings can take place.
To me, this looks like a perfect storm for a supply and demand outlay that would send home values headed in the wrong direction. I've seen plenty of home sale forecasts but where are the inventory forecasts that fully account for ARM reset defaults and streamlined short sales? If inventory balloons and first time homebuyers diminish as the dominant factor in the market (as expected), the consequence is obvious.
However, according to all forecasting models I've seen, I'm nearly alone in this thinking. Each one shows home values making gains or stabilizing by at least the 3rd quarter. Baffled by this, I have to confess that this is definitely not a commonly held position and this author is starting to feel like Peter Schiff in 2006. So, on the bright side, you're reading a minority report.
Either way, there are lessons here. It will take careful management of our clients' expectations this year. In a lot of cases, interest rates will rise between point of pre-approval and closing and this is always awkward. We might find ourselves bouncing back and forth between buyer's markets and balanced markets in the same 90 day cycle making the explanation of negotiating strategies a more delicate matter. And perhaps most importantly, while we might be able to quantify benefits of low rates and tax credits, any commentary on home values to prospective homebuyers and sellers should not be taken with a grain of salt but rather with a salt lick (including mine).
Comments(5)