Where is the housing market going in 2013?
(MoneyWatch) The housing market in 2013 stands on a precipice. While there is hope that the slow, but real, housing recovery that took hold last year will continue, fear remains that a sudden economic dip of the kind that could be caused by fiscal disputes in Washington will send the housing market back in retreat.
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Barring prolonged fights over the government's borrowing limit and federal spending, housing is likely to see mixed results this year. What that means: more foreclosures, slow growth in home prices in some markets, more regulation and low interest rates. Here are a few predictions for how the housing market will change -- or not -- in 2013:
1. Housing depression to persist through 2013. If the stock market fell 80 percent, everyone would be calling it a depression (or worse). Well, new home sales are still down nearly 80 percent from their peak before the housing crash, home prices are still down at least 25 percent from record highs, and foreclosures are still rolling through.
Rising home prices are good, but the more important metric to focus on is sales volume. In Chicago, one of the markets continuing to struggle to emerge from the specter of the recession, home sales are still down about 20 percent from 2006, according to the Illinois Association of Realtors. Though the gap between the real estate market highs of the mid-2000s and today's numbers is shrinking, there's still ways to go -- if the trends continue in the right direction.
While political leaders stuck a deal to avoid -- or at least delay -- the fiscal cliff, economic growth slowed markedly in the final months of the year. Weak economic expansion in the first quarter could spell more problems for the housing market. For the recovery to accelerate and the housing sector to continue healing, we need to see more buyers with stable jobs. Anything that jeopardizes employment could hurt the housing recovery.
2. Foreclosures will continue to plague the market. The flood of foreclosures that rolled in following the housing meltdown has not totally ebbed. Foreclosures will continue to damp economic growth in some markets, and not just the backlog of foreclosures in process. New foreclosures could pop up as well, particularly if we do fall back into a recession as underwater homeowners barely hanging on find themselves in foreclosure. Banks will also be forced to put their inventory of foreclosed homes on the books and on the auction block.
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3. Interest rates will stay low through 2013 and probably through 2014. The Federal Reserve recently announced that it will purchase even more mortgage-backed securities and bonds, going beyond the $45 billion a month it is already buying. The idea behind this controversial scheme is to keep interest rates low, allowing more people to take out loans, and pushing more buyers and investors toward homes and other types of real estate. We may not have even seen the bottom of mortgage rates yet, though they are nearly as low as they can go.
But tough lending standards are also here to stay for awhile, so securing a loan in 2013 won't be any easier. Some homeowners or potential buyers simply may not be able to take advantage of the historically low interest rates.
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4. There will be more litigation about foreclosures. The federal government signed another $8.5 billion deal with the banks over their foreclosure practices. Watch for as much as $300 billion in new bank fines, fees and settlements to come down the pike in the next year or so. The Consumer Financial Protection Bureau, a new federal watchdog created under the 2010 Dodd Frank financial reform law, and other regulatory agencies also are likely to hand out fines for companies that engage in illegal or misleading financial practices.
5. There are buyers, but they don't want to pay what sellers are asking. A modest uptick in home prices doesn't mean you can put your home on the market for what you paid 10 years ago. Sellers need to be more realistic on price, and then buyers will bite. That alone may push more homeowners underwater, which isn't good news for lenders or other homeowners in the neighborhood. It also means that...
6. Short sales and loan modifications will continue to increase. More banks and mortgage servicers have finally come around and started to offer homeowners mortgage relief in an effort avoid foreclosure, particularly short sales. The nation's five biggest mortgage servicers -- Ally/GMAC, Bank of America, Chase, Citigroup and Wells Fargo -- are required to spend part of the recent "national mortgage settlement" on loss mitigation efforts, including principal reductions. And with the passage of the American Taxpayer Relief Act of 2012, the recently enacted law that avoided the fiscal cliff, tax relief for mortgage debt forgiveness was extended another year. Since 2007, the government has not taxed phantom income on loan modifications, short sales and foreclosures, but that law was set to expire at the end of 2012, a move that could have deterred homeowners from taking advantage of short sales or loan modifications.
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This all noted, there is a cap to how high these values can go with current lending standards. But make note, HELOCs are making a come back, many big hedge funds and large funds are looking at infusing significant capital into the mortgage industry enabling the lenders the cash to lend to the still under served Jumbo Market.
Job growth will play a role, but limited houses on the market are playing a much bigger role in which direction the housing market goes. The only way I could see it take a dip is if a huge flood of housing comes on at the same time and the unemployment spikes higher.
As with any home purchase, make sure the payment is something you can afford for many years into the future and doesn't hold back the lifestyle desired.
Foreclosures will continue but at greatly reduced numbers from recent years and certainly will not "plague the market". And there is little basis for assuming that "Short sales and loan modifications will continue to increase" as the number of underwater mortgages has declined substantially and continues to decline as housing prices rise around the country. In fact, homeowners' equity has jumped 20 percent after a years-long slump (http://www.washingtonpost.com/realestate/homeowners-equity-jumps-20-percent-after-a-years-long-slump/2013/01/03/a857ba8e-54fb-11e2-bf3e-76c0a789346f_story.html?goback=.gmp_1907029.gde_1907029_member_202340312).
The housing market is recovering and that recovery will continue and stengthen in 2013 and beyond, regardless of the media's misinformed stories with prejudicial headlines.