Housing Outlook for 2010
As we turn the calendar on a year everyone had just soon forget, we look forward to 2010 with reserved anticipation. The housing market has offered some glimmers of hope recently, sales have improved, recently hitting their highest levels in more than two years. There's been talk of bidding wars resuming in some markets. And the chatter everywhere has started to turn to talk of a bottom. So where housing's concerned, things aren't looking so bad… right?
Mark Zandi, the chief economist of Moody's Economy.com, has some sobering predictions:
Home prices are going to fall 5% to 10% more — and over 30% in some places like Miami — between now and this time next year. Then they might start turning around. (Emphasis on "might.")
At the top of Zandi's list of worries are foreclosures — specifically, the millions of loans that are in foreclosure or headed there that can't or won't be modified. According to RealtyTrac, nearly 2 million housing units in the U.S. are in foreclosure or bank-owned, and millions more are likely to join them.
Zandi estimates that 2.4 million homes will find their way into foreclosure next year. He expects banks to start putting those properties on the market more aggressively during the first half of the year, resulting in a flood of cut-rate inventory that will drag prices down.
It would be one thing if banks could sell into a hungry real estate market. But that brings us to Zandi's second concern: skyhigh unemployment.
October's 10.2% figure was higher than what most economists forecast for the peak. A soft job market, especially one this soft, means potential buyers don't have money to pour into new homes or the confidence that they'll be able to hang on to their jobs and pay the mortgage on their existing home.
Another concern: Policymakers will pull their support from the market prematurely. Aggressive government moves, like the recently extended first-time-homebuyer tax credit and the Fed's purchase of mortgage-backed securities, have been propping up the market.
The purchase plan is set to expire in March, which Zandi says could bump mortgage rates up as much as a full point. "That raises the cost of buying a home, and in this fragile market people won't buy," he says. "And that's a problem."
All those factors are figured into Economy.com's housing price outlook for 2010 — as are local figures for income, population, interest rates, and foreclosures.
The weakest areas are Florida, California, Nevada, and Arizona — what Zandi calls the "usual suspects" — where foreclosures are highest and likely to rise.
But Zandi also points to less discussed regions where prices are still inflated relative to rents, like the Pacific Northwest and New York through Virginia.
If there's a bright spot, it's pockets of the Midwest — states like the Dakotas, Kansas, and Nebraska, which have stronger economies based on agricultural and energy industries.
Then there's Pittsburgh, which didn't have much of a housing bubble to begin with and is the only market projected to grow next year, up 0.41%.
The good news? "It's clear we're closer to the end of this crash than the beginning," says Zandi. Housing is more affordable, and construction is still low, so sales will eat up excess inventory. "We're moving in the right direction, and that's reason for optimism," he says.
Another plus: He says there's almost zero possibility of another U.S. housing bubble anytime soon.
What do you think? Have we reached a bottom in the real estate market? Or do we still have a ways to fall first? We'd love to hear your comments at the end of this newsletter.
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Getting a Mortgage in 2010: Things to Know
More than three years into a painful housing crash, the real estate market has sent recent—albeit tentative—signs of stabilization.
Home sales have increased, inventory levels are down, and price declines have become less precipitous. Along with more affordable home prices and a tax perk from Uncle Sam, attractive mortgage rates have been a driving force behind this development. The availability of low mortgage rates will play a decisive role in the performance of the 2010 housing market as well. To help consumers better understand the requirements and costs they will face as they shop for a home loan next year, we have compiled a list of things to know about getting a mortgage in 2010.
Still Tight: The steep run-up in home prices during the first half of the decade was fueled in large part by soft lending standards. Some bankers handed out loans without down payments or documentation requirements. But when the housing bubble popped and those loans became massive losses, banks began raising lending standards for borrowers everywhere. And with the labor market continuing to erode and mortgage delinquency rates setting new records, there is no reason to expect credit requirements to loosen in 2010. Lending standards have tightened dramatically between 2007 and 2009. We think there will be a little more belt-tightening in 2010.
Down Payments: This tight credit environment affects consumers in several ways. First, down payment requirements will be higher than they were just a few years ago. Loans backed by the Federal Housing Administration are at the low end of the spectrum and come with minimum down payments of 3.5 percent. Down payments on loans outside of the FHA will vary depending on the market, the borrower, and the type of property being purchased. Generally, to get the best rate around, you need at least 20 percent for a down payment. That doesn't mean you can't get a mortgage if you have less of a down payment, it just means that you are not going to get the best interest rates. Could lenders ease up on down payment requirements in 2010? Possibly. If lenders become convinced that home prices are improving, they may allow borrowers to put slightly less down. But don't expect that to occur until the end of the year—if at all.
Credit Scores: Borrowers will need a FICO score of at least 730 to get the best mortgage rates. They also will need to fully document their income and assets. To ensure that your credit score is as strong as possible, you should access your credit reports. The Fair and Accurate Credit Transactions Act entitles consumers to one free credit report from all three major credit reporting bureaus (TransUnion, Equifax, and Experian) each year. (The free reports can be obtained at annualcreditreport.com.)
Consumers should examine each report to make sure it doesn't include any errors. You need to know what your credit score is; you ought to know what's on your credit report; you ought to make sure that what's on your credit report is in fact yours. That's a must do for everyone, not just those applying for a mortgage.
FHA: Borrowers who can't meet these tighter lending requirements can turn to the FHA, a federal agency that insures mortgage loans against default. Standards for FHA loans are typically strict than those for private lenders. The average credit score for FHA borrowers is about 690, and the minimum down payment is 3.5 percent. If you can't make the 730 [credit score] or you can't make the 20 percent down payment, the next best thing is FHA. The downside is that FHA loans come with additional costs. Borrowers must pay an insurance premium as well as a slightly higher interest rate.
FHA Increase? With so many borrowers unable to meet today's stricter lending requirements, FHA-backed loans have become increasingly popular. Today, the FHA guarantees nearly 3 out of every 10 new home mortgages. That's a stunning increase from 2006, when the agency backed roughly 3 percent of new home loans. Meanwhile, the agency's finances have deteriorated considerably. The seasonally adjusted delinquency rate for FHA loans increased from about 13 percent in the third quarter of last year to 14.36 percent in this year's third quarter. At the same time, the agency's capital reserve ratio dipped below the level that Congress mandates. In the face of mounting political pressure, the Obama administration has announced new steps that may make it more difficult for some borrowers to obtain mortgages backed by the agency. The steps include raising the minimum FICO score, increasing up-front cash requirements, and possibly charging higher insurance premiums.
They want to ensure they are able to continue to support the housing market in the short term and provide access to home ownership over the long-term, while minimizing the risk to the American taxpayer.
Jumbo Mortgages: Rates on more expensive home loans known as "jumbos" have dropped to extremely attractive levels that rival all-time bests. But while we expect rates on jumbo mortgages to remain historically attractive throughout 2010, many borrowers won't be able to obtain them. That's because most banks have to keep jumbo mortgages on their books and therefore apply much stricter lending standards to them. Your down payment requirements for jumbo mortgages are anywhere between 40 percent down to 20 percent down, depending upon what is happening in a particular marketplace. You will have to show a very strong credit score, and you may have to show extraordinary income.
Fed Rate Hike: In attempting to jump-start the economy, the Fed has slashed its benchmark federal funds rate to as low as zero percent. And even as some express concerns about future inflation, the central bank in early November said that economic conditions were "likely to warrant exceptionally low levels of the federal funds rate for an extended period." As such, economists don't expect the Fed to raise rates anytime soon. The statement does not lead us to change our view that the Fed will keep rates unchanged until the September 2010 meeting, when we expect the first rate hike. But while an increased federal funds rate could push rates on certain products—such as adjustable rate mortgages or home equity lines of credit—higher, it has little direct influence on fixed mortgage rates.
Recovery: A recovery in the U.S. economy may also lead to increased mortgage costs. That's because economic improvement could create more demand for credit, which pushes rates higher. At the same time, a recovery could embolden investors to move money out of ultra-safe assets like 10-year treasuries and into more risky investments. And since 30-year fixed mortgage rates tend to track the yield on the 10-year treasury note, such a development would put upward pressure on mortgage rates. Economic improvement and other factors could push rates on 30-year fixed mortgages as high as 5.75 percent by midsummer. After that, you are going to be at the whims of the economy.
Fannie and Freddie's Future: A wild card in the outlook for mortgage rates is the administration's plans for Fannie and Freddie. The two mortgage finance giants—which buy home loans from banks—are a key source of liquidity for the market. The government-chartered companies have long been controversial, and speculation about their future has been mounting since their shaky finances forced Uncle Sam to take over last year. The administration's plans for their future—which could include liquidation or converting them to public utilities—could become clearer in early 2010. This decision could have profound implications for mortgage rates. We could have some dislocations in the supply chains with mortgages depending upon how immediate or how gradual the changes to the structures of those companies are.
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What to Do in 2010: Banking, Loans and Credit Cards
When it comes to your debt in 2010, you’ll want to combine a strong offense (grab a mortgage or refinance) with a powerhouse defense (beat back rising credit card rates and fees).
Mortgage rates are at historic lows and home buyers will be able to snag a special tax credit until July. So early 2010 will be a prime time to refinance your mortgage or apply for a new home loan. But credit card issuers will continue turning the screws on customers in 2010, raising rates and hiking or inventing fees. Because the credit card law taking effect in February will restrict lenders from punishing riskier customers, many good-citizen cardholders will be told to pay more.
Here are the best strategies for borrowing in 2010:
Refinance Your Mortgage
Low mortgage rates will make refinancing tempting as we begin the new year, especially if you have an adjustable-rate mortgage resetting in 2010 or 2011. Many mortgage analysts think rates are as low as they’ll ever be. So the longer you wait, the more you risk the low-interest window closing on you. Just remember the advice of many economists: Don’t refinance if you don’t expect to stay in the home long enough to recoup the closing costs.
Skittish lenders will be quick to reject applicants who seem too risky, so be sure you have what it takes to get approved for a refinancing. For example, your mortgage costs shouldn’t total more than 29 percent of your income.
If you’re upside-down in your mortgage and unable to refinance to a lower rate, but you’re current on your payments, you may be eligible for the federal government’s underutilized Home Affordable Refinance Program, which expires June 10. If you got your home’s first mortgage before January 2009 and it’s owned or guaranteed by Fannie Mae or Freddie Mac and doesn’t exceed 125 percent of your home’s current value, you’re eligible. If you’re behind on your mortgage payments or experiencing financial hardship, investigate the government’s Home Affordable Modification Program. Although both programs suffered from a slow ramp-up in 2009, look for efficiency improvements in 2010.
Buy a House
If you’ve been sitting on the sidelines waiting for the right moment to make an offer, 2010 will be the time. We’re not going to see dramatic increases in interest rates, but they’re likely to gradually move higher over the year. If you’ll qualify for the $6,500 home-buyer tax credit for current owners or the $8,000 credit for first-time buyers, make an offer before winter ends. You need to be under contract by April 30 to get the tax break.
Keep an Eye on Your Credit Score
A good credit score is more important than ever for anyone trying to get approved for loans or credit cards in 2010 and qualify for the lowest rates. Lenders consider a credit score above 720 to be good. To learn your score, order your free credit report from annualcreditreport.com and spring for the $8 additional charge for the magic number. Or take the results from the credit report and feed the info into the Score Estimator at MyFICO.com.
Check for Any Closed Credit Card Accounts
When you read your credit report, make sure all your credit card accounts all still open. You may have cards buried in a drawer that were canceled without your knowing it, and a credit-card cancellation could have reduced your credit score. Even after the new credit card law takes effect in February, issuers will still be allowed to cancel your account without notifying you. Believe it or not, that’s not considered a material change in the terms of your account.
Charge with Every Card You Have (sensibly)
In 2010, credit card companies will be looking for any excuse to lower your credit limit, raise your interest rate, or nix you as a customer altogether. Banks are still dealing with a serious increase in uncollectible balances. Bank of America, for instance, wrote off 76 percent more in uncollectible loans in 2009 than the previous year. If you’re not charging on a card and not carrying a balance, you’re not making the company any cash. That means you’re creating a bulls-eye on your credit line. So charge at least a little on every card every month, but be sure to pay off the balance each month so as not to go into debt and pay the exorbitant interest rates charged by most card companies.
Fight Higher Rates and Fees
No matter how good a customer you are, don’t be surprised if you get hit with higher rates or new fees in the coming year. If that happens, call the card issuer and politely, but firmly, ask the rep to reverse the move. If you’re a longstanding customer on good terms with the company, there’s a decent chance you’ll get satisfaction, especially if you threaten to walk. Card issuers these days often toughen up “on a batch basis” without paying much attention to the particular cardholder’s history. Sometimes they’re simply relying on you not even noticing the change. You’d be surprised what a phone call can do.
Opt Out of Overdraft Charges
Beginning in February, you’ll have to tell your credit card issuer if you want to be allowed the ability to go over your limit (and owe an overdraft fee of up to $39) when making a purchase. Starting in July, you’ll have to do the same thing with your debit card — that is, you must “opt in” if you want overdraft protection on your debit card purchases and ATM withdrawals. If you do nothing, you’ll automatically opt out of both.
Banks will lobby hard to get you to opt in and add this “protection,” so they can rack up overdraft fees. Don’t fall for the bait. We can’t think of a reason why you’d want to opt in. True, you might get embarrassed if your card is declined in public. But to us, that seems better than having to cough up $39.
Consider a Credit Union
Interest rates on cards from credit unions are about 20 percent lower than at banks, according to an October 2009 study by Pew Charitable Trusts. One reason: Unlike banks, which can slap on sky-high rates, federally chartered credit unions can’t charge more than 18 percent. (State-chartered credit union rates are also capped at about that rate, but state laws vary.) You’ll have to become a credit union member to get a card; find one at FindACreditUnion.com.
We hope these tips will help you save more, and earn more, in 2010.
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