Real Estate Market Forecast

Hang on! More Foreclosures Are Coming

Do you like roller coaster rides?  Check this out: The number of long-term adjustments completed under the president’s foreclosure prevention plan rose to 66,465 at the end of December, or 7.4% of all trial modifications started, up from 31,382 a month earlier. Another 46,056 modifications are pending borrowers’ final signatures, according to Treasury statistics released Friday. Another 48,924 were denied permanent modifications, mainly because they did not make their trial payments on time, didn’t hand in the needed paperwork or didn’t meet the program’s criteria.

So what does this all mean?  Loan modifications aren’t working. Unless and until there is any kind of significant  reduction of principle, most people getting a loan modification will stop making their payments if they are $100,000+ upside down on their home. And there are A LOT of people upside down. This will trigger lots of “jingle mail,” where the homeowner just sends back the keys, in 2010.  According to one business journalist: “The big wave of Option ARM resets has yet to come, and given the drop in home prices, refinancing won’t be realistic.”  Expect there to be more short sales coming in 2010. But 2010 may bring more buyers now that FHA has given the green light.

Housing experts remain concerned that the rate of foreclosures still outpaces the help homeowners are receiving under the program. A record three million homeowners received at least one foreclosure filing in 2009, according to a RealtyTrac report released last Thursday. A lot of borrowers are too far underwater or don’t have enough income to qualify for a permanent modification, said Celia Chen, senior director at Economy.com. Many will not be able to provide all the documentation needed. Administration officials said they continue to review the program to make sure it is helping those in need.  Chen said she doesn’t think there’s anything the government can do to keep these borrowers in their homes. “As more of these loans fail to make it to permanent modifications, a lot will go back on the market as foreclosures and that will depress home prices,” said Chen, who expects home prices to fall another 10% by the third quarter of this year.

So what’s the bottom Line here?  Although the number of delinquent properties and shadow inventory continue to rise, early indications seem to point toward a reality check sometime in the near future. Once
existing inventory is purchased, expect a significant lag time to meet growing demand. In other words, supply will once again have to catch up with demand.  Currently, distressed homeowners have reduced expenses, moved in with family and made other temporary arrangements in an effort to “ride out the storm.”  I expect that short term solutions will eventually give rise to the need for permanent housing.

Now, as the need grows again, there will be another push on existing inventories.  Many savvy homeowners are coming to grips with an inevitable dent in their credit ratings and opting for short sale of their homes.  With this trend, it will present investors with many good opportunities over the next 18 months.

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