Attempts at Relief and Reform

Predictions for 2010

Posted on Wednesday, December 23, 2009


The bad news is things will get worse before they get better. The good news is they WILL get better and we'll see the beginning of that turn around in.


Defaults and Foreclosures. Defaults And foreclosures along with shadow inventory in the pipeline now will add to existing Inventory/supply. For example, in Florida alone, almost 25% of all mortgages are currently in some stage of default. Interest rate resets will begin to accelerate next spring from about $4 billion resetting in March 2010 to a peak of $14 billion in September 2011. The current level is about $1 billion. About $500 billion of option ARM loans are outstanding. You’ll recall rate resets were the primary cause for the initial subprime defaults that started this whole thing. It will be several years before these loans and housing units are flushed through our system but expect 2010-2011 to be among the worst years.

Prices and Sales. Excess supply will continue to drive down prices and soften sales. The good news is that, absent any new surprises, prices in most markets will have bottomed before the end of 2010. The bottom will over correct below historically accepted rent to own rations. We saw the first real decline in new home sales (down 11% for the month of November) today. And prices nationwide are down from a mean $221,600 for last year to $217,000 this year. Price decline are significantly more serious YOY in some areas.

Negative equity. That adverse feedback together with negative equity and unemployment and other factors will result in more defaults, foreclosures, price declines and so on. As of now almost 23% of all homes with loans in the US are underwater (that translates to about 10 million borrowers and 10 million units which can potentially be added to the already swelled housing inventory) and almost 50% of home with mortgage loans in Florida are underwater.

Exact impacts will be property location, price range, and type centric. For example, about 42% of all underwater homes are in California and Florida and almost 43% of all foreclosure actions are occurring in Florida, California, Nevada and Arizona. Likewise, because the available supply of condominiums is so much higher than other property types, those units will see much larger price reductions than single family units. And because new home loans in the FHA price range are so much more easily available than other price range loans and almost 50% of all sale are to first time buyers now, the homes in that price range will have more interested buyers, move quicker and fetch a better price than units in other price range.


Defaults and Foreclosures. Commercial defaults will become more apparent as kicking the can down the road becomes impossible. I can tell you first hand that the only thing preventing a real commercial real estate melt down right now are bankers diligently trying to work-out billions of dollars in CRE.

Prices and Sales. Cap rates and hence the values and prices tied to them will continue to decline as vacancy, rent reduction, and distressed often times obsolete inventory grows.
The biggest concern for commercial is still credit, as billions of dollars in commercial debt come up for refinance with few takers. Changes made in recent months to the ITS REMIC trust rules and recent TALF and other Issues are addressing this but not broadly enough to make a big enough dent.

FDIC. More bank failures will be one immediate result. The FDIC is currently at 140 take-overs with hundreds more on the list. New accounting rules set to take a phased in effect require, among other things, that banks move CMBS back onto their balance sheet, will cause certain failure for many. Smaller regional and community banks will bear the brunt to the benefit of larger banks. So much for “too big to fail.”

Government Intervention. Expect new measures and tweaking of existing measures designed to correct both residential and commercial problems. For example, mandatory mediation for homestead foreclosures, currently only required in a few states, will become more widespread and MHA will be further adjusted eventually demanding more lender concessions. In the commercial area, FIRPTA may be amended to encourage foreign investment and the carried interest rules will be a subject of debate between lawmakers seeking to raise money to pay for other programs and industry insiders seeking to avoid an even bigger mess in their neck of the woods.

Rates. Mortgage interest rates have to go up. Unless the government decides to extend its Fannie-Freddie purchase program or do something else to juice the credit markets, mortgage rates will rise steadily, probably leveling off somewhere around 6 percent. As the economy expands, inflation is likely to return, and interest rates will also rise. Rising interest rates and prices, especially for real estate, will choke investment, and the recession follows.

Deficit. Perhaps most unfortunately, the deficit will continue to grow increasing the potential for dragging this mess out beyond our own years as baby boomers continue to add to the systemic burden with their well deserved retirement. Talk about kicking the can down the road.

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