Monday, January 04, 2010

5 housing issues to watch in the new year

From The Wall Street Journal:
The housing market, which brought the economy to its knees in 2008, struggled to recover in 2009. The modest gains of the past year can be credited in many ways to federal support that will be removed at some point in 2010. ... That makes for an uncertain outlook for the year ahead...

Here’s our list of five big issues to keep an eye on in 2010:
  • Mortgage rates: The Federal Reserve has kept mortgage rates low for most of 2009.... Whether the private market is ready to fill the gap when the Fed exits is one of the hottest debates between economists, investors and analysts.
  • Fannie, Freddie and the FHA: Nearly nine in 10 mortgages are now being backed by Fannie Mae and Freddie Mac, the mortgage-finance giants taken over by the government, or government agencies such as the Federal Housing Administration. The future of Fannie and Freddie remains nearly as uncertain now as it was one year ago.... The FHA, meanwhile, has suffered from heavy losses that could lead to a taxpayer bailout...
  • Loan modifications: Loan modification efforts have helped to hold back the supply of foreclosures for sale. The number of seriously delinquent loans continues to climb, so it’s reasonable to expect a pick up this year in distressed sales and foreclosures that hit the market.
  • More loan resets: Analysts and pundits have been warning for years about the coming wave of option adjustable-rate mortgages that will jump to sharply higher payments beginning this year. Those loan recasts are concentrated particularly in high-cost housing markets.... Meanwhile, more interest-only loans that allowed borrowers to avoid making principle payments for three, five, or seven years will reset to higher payments.
  • Tax credit and home sales: Sales were fueled in the late summer and early fall in part due to an $8,000 tax credit that had been set to expire in November. Congress has extended that through the first half of next year, but some economists say that the tax credit will steal demand from future months.... There’s still a good deal of debate between housing economists and analysts over whether a “double-dip” could lead home prices to fall below the bottom that was set last April.
As long as mortgage rates remain at historic lows, option ARMs will be a non-issue. If mortgage rates rise toward the historic norm—an unlikely event in the near-term—only then will option ARMs become a problem.

As far as the FHA and GSEs are concerned, the government is continuing the reckless, low down-payment lending that got us into the current mess.

21 comments:

  1. I disagree with low interest rates equaling a non-issue for option ARMs. These loans will reset at a 25 year amortization (for a 5-year option ARM), rather than the original 30 year loan, which will create higher payments. And as most of the people who got these loans were leveraging themselves to 'stretch' into a better home, they are already paying the max they can afford. It should be an interesting spring!

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  2. "It should be an interesting spring!"

    I agree. With inventory being about 1/2 what it was last spring, I shudder to think how many more bidding wars I will lose this time round.

    http://www.virginiamls.com/charts/index.htm

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  3. "As long as mortgage rates remain at historic lows, option ARMs will be a non-issue. If mortgage rates rise toward the historic norm—an unlikely event in the near-term—only then will option ARMs become a problem."


    James, that sounds new to me. Could you explain why?

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  4. This spring will be the time for banks to start dumping that shadow inventory onto the market. With rates expecting to increase due to the Fed pulling out, the big banks will have no other choice but to unload the toxic waste. However, if they decide to hold onto the waste longer, we can expect a Japanese decade of stagnation.

    Lemmy.

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  5. Perhaps I am wrong regarding option ARMs. I'm no expert on mortgages. (Hey, I'm a renter.)

    The idea that option ARMs will be a problem assumes that most people with option ARMs were not paying down any of their principal. I'm not sure I trust that assumption. Keep in mind that even 30-year fixed mortgages pay down little principal in the early years. Also keep in mind that many people will have gotten pay raises over the past five years, so their ability to afford the mortgage should be greater than it was when they originally got it. This is especially true for younger workers who often experience more rapid pay increases. (God, I feel like Lance writing this paragraph.)

    I was thinking about the interest portion of the option ARM when I wrote the blog entry. Interest rates are currently lower than they were 5 years ago, so I doubt that portion will be a problem. I don't know if the principal portion of the option ARM will become a problem or not.

    According to the old IMF graph (which I thought I posted to Bubble Meter, but I can't find it), the wave of option ARM resets should begin this spring.

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  6. "Also keep in mind that many people will have gotten pay raises over the past five years"

    Yeah also keep in mind all the pay cuts bringing people back to their salary 5 years ago as well....if you are considering the people who still have jobs at all.

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  7. James, you have been drinking with David again.

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  8. "Yeah also keep in mind all the pay cuts bringing people back to their salary 5 years ago as well....if you are considering the people who still have jobs at all."

    You mean here like the (close in) areas of DC where incomes ROSE 7-9% this latest year in the heart of the so called recession???

    http://www.census.gov/acs/www/

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  9. "Nearly nine in 10 mortgages are now being backed by Fannie Mae and Freddie Mac, the mortgage-finance giants taken over by the government, or government agencies such as the Federal Housing Administration."

    Is this 9/10 new mortages, or 9/10 of all existing mortgages?

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  10. "You mean here like the (close in) areas of DC where incomes ROSE 7-9%"

    1) No I meant in the USA, as in the whole country

    2) My company, a government contractor (close in), cut everyones pay 15%. So yeah, even in DC. The government stimulus covers street lights, but I guess no new servers for the pentagon. Great news for the mexicans in gaithersburg!!!!

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  11. "My company, a government contractor (close in), cut everyones pay 15%. So yeah, even in DC."

    Well I guess that proves it then. Dont know why the census and others even report income stats. Everyone knows DC income is falling because it happened to everyone in this guy's company.

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  12. Everyone knows DC income is falling because it happened to everyone in this guy's company.

    LOL - dont you know the "one guy's company index". Its a highly respected indicator of accuracy for conditions overall.

    Look for a bigtime selloff in the asian markets tomorrow as they open and learn that some guy's company cut pay 15% in DC.

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  13. I just read this truly disturbing news - the one guy's company index is down!

    My god, what a catastrophe. Timmy, call Bernanke, call Roemer, call Kashkari, call everyone! Call Case and that Shiller guy too. Call Keynes -- what he's dead -- well dig up his bones and bring him here NOW!!!

    I just read some guy's company had 15% pay cuts - a clear a sign of doom as I have ever seen. Housing in DC is going down - SELL THE WHITEHOUSE DAMMIT!!!

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  14. "Well I guess that proves it then. Dont know why the census and others even report income stats."

    Can you please provide the link to the 2009 stats again please? We got our paycut 6 months ago.

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  15. Paycuts? Are we talking about pay cuts? I guess someone forgot we have double digit unemployment!

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  16. Double digit unemployment? Heh - not in the immunozone where we peaked at 4.7% and am now at 3.9% and falling...

    http://www.google.com/publicdata?ds=usunemployment&met=unemployment_rate&idim=county:PA510950&q=fairfax+county+unemployment+rate#met=unemployment_rate&idim=county:PS510100

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  17. curious about geographyJanuary 07, 2010 10:22 AM

    how big is immunozone anyway? Is it 1 or 2 square miles in VA?

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  18. Immunozone = Arlington, Alexandria, & parts of Fairfax

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  19. So you guys are making fun of a guy who got a paycut living in one of those three towns (claiming how insignificant it is)....yet dismiss that the entire country is tanking because you live in one of those towns?

    I love the hypo-crazy.

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  20. kahner said...
    "Is this 9/10 new mortages, or 9/10 of all existing mortgages?"

    It's 9/10 new mortgages. As the WSJ wrote, "Nearly nine in 10 mortgages are now being backed by Fannie Mae and Freddie Mac...." "Now being" refers to current activity.

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  21. James wrote:
    "The idea that option ARMs will be a problem assumes that most people with option ARMs were not paying down any of their principal. I'm not sure I trust that assumption."


    According to a CNN article:

    "...93% of option-ARM buyers select a minimum amount less than the interest due."

    http://money.cnn.com/2009/11/24/real_estate/option_ARM_defaults/index.htm

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