The Uncertain Housing Outlook by CalculatedRisk LA Times 10-15-2009

The Uncertain Housing Outlook by CalculatedRisk LA Times 10-15-2009

The Uncertain Housing Outlook
By CalculatedRisk LA Times
October 15, 2009

The housing outlook has probably never been more uncertain ... and the details are masked by many distortions.

So, as confusing as it is, here is a rough overview ...

Supply: the supply of distressed homes has been severely restricted by a combination of foreclosure delays and trial modifications.

Demand: demand has been distorted by the first-time homebuyer tax credit, by extraordinary levels of lending using government-insured FHA loans, and the Fed buying GSE MBS pushing down mortgage rates.

This has led to a buying frenzy in many low end areas, and has pushed up prices.

Look at the California Bay Area report today from DataQuick:
Home sales in the Bay Area edged up in September as buyers scrambled to take advantage of low mortgage interest rates as well as a tax credit due to expire at the end of November. ... The month-to-month gain was atypical: sales normally decline around 11 percent from August to September. ... The use of government-insured FHA loans – a common choice among first- time buyers – represented 29.3 percent of all Bay Area purchase loans in September.
This is a very large percentage of government-insured FHA loans - and many of these buyers are probably using the tax-credit as their downpayment (which will probably lead to higher defaults).
“I don’t think it’s a bad thing that the bad loans occurred. It was an effort to keep prices from falling too fast. That’s a policy.”
Barney Frank, chairman of the House Financial Services Committee on recent FHA lending.
So what does this mean for the housing market? In the short term:

•Existing home sales will probably be strong in September based on regional reports.

•With restricted supply and increased demand, prices (Case-Shiller) will probably be strong through at least September (reported with a delay).

•Reported inventories will move lower.

But the longer term (2010 or maybe later) will really depend on the success of the modification programs. And according to Citi today, we won't have a feel for the success rate of HAMP until probably Q1.

Amherst Securities isn't optimistic: Timing is Everything, Oct 14, 2009 (no link)
Implementation of the HAMP modification plan is making it even more difficult to predict cash flows. The trial modification period essentially holds the loan in a suspended state ... making it difficult to assess what is happening with modifications. In the end, we expect relatively few of these modifications to be successful.
I also expect most HAMP modifications to fail, although many borrowers might make their payments for a few years, and then finally default.

Even excluding the HAMP, because of slowdowns in the foreclosure process, the lenders are sitting on a backlog of foreclosures in the pipeline (not REOs, but properties in the process). So there should be an increase in foreclosures soon - how soon, and how many, is a guess.

And on the demand side, the Fed's purchases of GSE MBS will end in Q1, the interest in the first-time homebuyer tax credit will wane just like the cash-for-clunkers program (even if it is extended), and the FHA will probably be forced to tighten standards (or at least cut loose poor performing lenders).

So my guess is another down turn in the housing market in 2010 (existing home sales and prices), although prices have probably already bottomed in many low end areas.

But the outlook is very uncertain.


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More inventory

mean more $$$ us DGers. Not only that its on us as investors to get more creative (ethically) in helping families achieve the American Dream. A lot of the foreclosures in area code (30310 and others) are the result of unscrupulous people selling homes that were never worth what they said they were worth. A person can have a sound and decent home without having to keep up with the Joneses.


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