9 Housing-Market Head Winds for 2009

[Mrs. Sharon B. Hodge]

9 Housing-Market Head Winds for 2009
By Luke Mullins

A look at the forces that will be working against a housing recovery in the new year

With home prices having dropped a painful 21 percent from their 2006 peaks, property owners everywhere could use a splash of good news in their New Year's Eve cocktails. But as a nasty recession is now part of the picture, the chances of an aggressive housing market rebound next year are dim. "A lasting recovery in the housing market?" says Mike Larson, a real estate analyst at Weiss Research. "I don't see it in the cards until the back end of the year—if that."

Here's a look at the factors that will be weighing down the housing market in 2009:

1. Recession After months of speculation, the National Bureau of Economic Research made it official Monday, announcing that the U.S. economy entered into a recession in December 2007. The only question now is: How painful a recession will we have? In a November 21 report, economists at Goldman Sachs revised their previous forecast to reflect a more significant economic contraction and higher unemployment. "We now estimate that real GDP is falling at a 5 percent annual rate in the current quarter, and we expect this to be followed by declines of 3 percent and 1 percent in the next two quarters," the economists said. "This deepens and extends the expected recession, bringing the drop in GDP close to the decline seen in 1982 (2.3 percent in our forecast versus 2.7 percent then)." The recession will exert downward pressure on the housing market in a number of ways.

2. Higher Unemployment The shrinking economy will result in additional layoffs, which will work to smother housing demand. The unemployment rate has already been climbing—it now stands at 6.5 percent—but many expect it to increase significantly in the coming year. Goldman Sachs projects the unemployment rate to hit 9 percent by the end of 2009. "This forecast, if correct, makes the current recession unequivocally the worst single downturn on record since World War II insofar as increases in joblessness are concerned," the economists said. Fewer jobs mean fewer home buyers, since an income stream is essential to obtaining a mortgage. "A job is necessary for a home," says Mark Zandi, chief economist at Moody's Economy.com. "Without [a job] you can't get [a home]."

3. Consumer Confidence If consumers are worried about the state of the economy and their jobs, they are much less likely to make the biggest financial investment of their lives: buying a house. With a leading survey showing that consumer confidence in the United States dropped to 28-year lows in November, downward pressure on this front will be working against the housing market as well. "You generally don't buy a home unless you feel pretty good about your economic situation," Zandi says. "No one feels good [today]."

4. The Underwater Effect A recent Zillow report found that 1 in 7 American homeowners has negative equity—owing more on a home than it is worth. (For those who bought a home in the past five years, it's nearly 1 in 3.) Many homeowners in this situation will choose to simply walk away from their homes rather than continue to pay off a devaluing investment. And with home prices expected to fall further next year, the number of "underwater" mortgages will most likely increase. "The underwater phenomenon is going to be very bad in 2009," says Christopher Thornberg of Beacon Economics.

5. Tighter Credit As banks face higher loan delinquencies, they've responded by jacking up their lending standards for even well-qualified borrowers. The Federal Reserve's most recent Senior Loan Officer Survey found that 70 percent of domestic banks had boosted their lending standards for prime mortgages. More stringent terms will prevent certain borrowers from obtaining mortgages, thereby limiting demand for housing.

6. Slowing Household Formation At the same time, the pace of new household formation is slowing, which further chips away at housing demand. Richard Moody, chief economist at Mission Residential, says the development is linked to three factors: More singles are moving in with each other, young adults are returning to live with their parents, and fewer immigrants are entering the country. "For those three reasons, you are seeing a slowdown in the rate of household formation," Moody says. "And to the extent that the economy and the labor market remain weak this year—which I think they will—then that's going to continue."

7. Radioactive Effect Despite lower real estate prices and cheaper mortgage rates, the pain inflicted by the housing bust will frighten many would-be buyers away from the market next year, Larson says. "Enough of your 'average Joes' have been burned very badly and will be burned by the time this is all over that investment money is not going to flood back into the market," Larson says. "Any recovery—in my opinion—will be gradual and is going to take time."

8. Foreclosure Sales A huge problem for the housing market in 2008, foreclosure sales will continue weighing down the market next year. "There was a surge this year," Zandi says. "But next year [there] will be even more." While that will give buyers an opportunity to go bargain hunting, it's bad news for sellers. "It puts more homes out there for sale at a very deep discount," Zandi adds.

9. Subprime Mortgages While resetting subprime mortgages may not be a leading factor behind the decline in home prices—as they were this year—such products will again be working against the housing market in 2009, Thornberg says. "There are still lots of subprime mortgages out there that are going to reset not just in 2009, but 2010 and 2011," he says. "And so that's going to be a consistent problem for a while, although it is probably reduced in magnitude [from 2008]."

HOWEVER, ON THE DOWN SIDE:

Fed Attacks Mortgage Rates: 4 Things to Know

The Federal Reserve on Tuesday announced a new approach to stabilizing the housing market: driving down mortgage rates.

The effort is based on a two-pronged program that involves buying up to $100 billion in debt of Fannie Mae, Freddie Mac, and the Federal Home Loan Banks, while at the same time purchasing up to $500 billion of mortgage-backed securities backed by Fannie, Freddie and Ginnie Mae.

The initiative is intended to lower Fannie and Freddie’s financing costs, which will enable the government-controlled, mortgage-finance giants to pass along those savings to consumers in the form of lower interest rates.

Here’s what you need to know:

1. Wide Spreads With home prices continuing to decline and investors unsure as to the extent of the government’s support of Fannie and Freddie’s obligations, the mortgage finance giants have had to pay higher premiums on their debt. This increases their cost of funding and translates into more expensive interest rates for consumers. “Spreads of rates on GSE debt and on GSE-guaranteed mortgages have widened appreciably of late,” the Fed said in a statement announcing the initiative. “This action is being taken to reduce the cost and increase the availability of credit for the purchase of houses, which in turn should support housing markets and foster improved conditions in financial markets more generally.”

2. Half Point Cut So what will the actions mean for mortgage rates? Keith Gumbinger, of HSH Associates, says that the moves could bring fixed mortgage rates down by as much as a half point. “Having someone with hundreds of billions of dollars to buy these things--fresh money in the market--means rates should go down,” Gumbinger says. “It’s a direct pass through [to consumers], if their cost of funds goes down, down goes the cost of mortgage credit on the other side.”

3. Necessary, But Not Sufficient In a smoothly functioning housing market, such a significant drop in mortgage rates would have a profound impact on housing demand: more buyers would enter the market to take advantage of the lower rates, says Susan Wachter, a professor of real estate at the University of Pennsylvania's Wharton School of Business. But with home prices already having dropped more than 20 percent from their peaks and facing additional declines due to a weakening economy, higher job losses and fresh foreclosures, the results of this program may be more modest. ”The responsiveness that one would expect may very well not be there because the magnitude of the driving factors that are pulling the market down [is] just so large,” Wachter says.

4. Explicit Guarantee? Richard Moody, chief economist at Mission Residential, argues that the Fed’s actions aren’t the best way to stabilize Fannie and Freddie’s funding costs. Instead of relying on the government to purchase such assets, he argues that Uncle Sam should explicitly back Fannie and Freddie’s debt. “That way [the Fed is] not on the hook for these purchases like they are now,” he says. This step would reduce the risk of buying Fannie and Freddie’s debt and lower their costs of funding, Moody says.

5. One of the worst obstacles facing the average home buyer is the 20% down. Only 80% of the loan will be financed. Adding lenders fees of around $15,000 and up, plus points starting at $3,000 for the first half percent, then graduation higher, and higher for each half percent thereafter, usually going for $12,000 to $15,000 total, plus around $2,200 rounded closing cost or higher, it puts buying a house far out of range for almost all of America. The average price of a house today will run around
$350,000. Twenty percent down, would run $70,000, and adding lending fees, points, and closing, that would run in the neighborhood of $102,200 just for a down payment to be able to get into a new loan. Before the housing bomb followed by the ultimate fall of the housing market, this would be the same amount that would be financed totaled, instead of the amount that it takes just to get a loan financed. Americans no longer know how to save or sacrifice in order to reach their goals.

There was a large Vietnamese family living near Houston, Texas. They never had electricity turned on in their rented house. They conserved in every way possible, never buying anything that was not an absolute matter of survival. They did not buy furniture, and slept on mats on the floor at night, and during the day the mats were neatly rolled up and put into the closet. There were around 25 adults living in one home, not counting children. Everyone worked except the smallest of the children. Even the older children managed to work for neighbors and bring home money. All of their money each payday went into a central savings location. The adults lived off of one bowl of rice a day plus vegetables. After about a year and a half of hard work and sacrifice, they were able to buy a family restaurant featuring the best Vietnamese food in the area. They did not have to get a loan, and were able to pay cash for the building and the remodeling, with upstairs individual apartments for each individual family. The children also worked in the family business, chopping or washing vegetables, cleaning floors, washing dishes and so forth. They also had a savings fund for the education of all of the children who never had to do without anything after that. They never had a use for mindless television because the family stayed together, and worked together, and the children would rather be with their parents a relatives instead of sticking them in front of a TV for a babysitter. The children felt loved and wanted and were glad to help to be in that sort of strong support system.

Americans never want to do without anything, and are encouraged to buy what ever whim hits their fancy, and just charge it. Then they are under a mountain of debt all of their lives working to pay the debts, paying back as much as triple for everything they buy instead of waiting to pay cash. The mother and father are working, and the children are left alone, they are neglected, and the marriages are in trouble more often than not. The children get into trouble and look to other kids just to have someone to be with. This does not even resemble a family unite anymore, and everyone is off doing their own thing instead of all working together to reach their goals. It would not hurt the American adults to eat less, and only eat healthy foods. They children would be so much better off to be with their families, mothers, and fathers. They debt ratio is what is killing the American families, and everyone could stand to learn a lesson from a Vietnamese family.