Lisa Chapman - Business Coaching, Planning and Due Diligence

1. Little or No Appreciation as Market Bottoms

In parts of the country hardest hit by 2007 - 2008 foreclosures such as California, Michigan and Florida, prices will continue to soften. In scattered markets, the bottom will already have been reached by April but media won't report it until late summer, after a trend has been established.

There will be no more dramatic price drops such as those 30% to 50% declines we saw between 2006 and 2008. But the market will not stabilize in 2009. Furthermore, consumer confidence will continue to fall, and more people will find themselves out of work.

On the bright side, employed home buyers with good credit will find 2009 is an excellent time to buy.

2. Housing Inventory Will Fall

Sellers will withhold listings from the market or cancel listings that don't sell within 90 days. Although persistent demand will come from first-time home buyers and investors, inventory will fall. Falling inventory will not drive up the prices.

The number of homes for sale in states such as California will decrease by 45% or more from the same months in 2007. New home starts will fall by the wayside, and the construction industry will see at least another 10% in layoffs.

Although fewer homes will be available for sale, those sellers will be motivated to sell.

3. Bank Will Rent Out REOs

In an effort to drive up housing prices, banks will slowly release their REO inventory to the market and price those homes at 5% to 20% under comparable sales. Banks will be under great pressure to cut losses and increase revenue. Although state charters prohibit banks from renting out bank-owned homes, banks will find a way to work around this prohibition.

By transferring title from bank-owned homes into holding companies, banks may find a loophole that will allow them to rent out homes instead of putting them on the market. This maneuver will let banks receive income while waiting for the market to turnaround.

To rent the homes, banks will be forced to fix them up.

4. Buyers Will Compete in Multiple-Offer Situations

Due to limited inventory, coupled with pseudo pricing on short sales and foreclosures, more buyers will find themselves competing over the attractive listings. It will not be unusual for sellers to receive 20 or more offers on these listings.

Multiple offers may drive up the prices to market value but buyers will refuse to pay over market value. The stiff competition will cause frustration and confusion among buyers who will find themselves going head-to-head with investors. Cash buyers will win every time over buyers who need financing.

This means it will be more important than ever for home buyers to hire an excellent negotiator.

5. Real Estate Competition Will Shrink

One can count only so many sheets of copy machine paper before it makes no further sense to try to cut costs. Although real-estate related companies such as banks, escrow and title have already reduced staff and cut expenses, many will find themselves unable to continue operating without folding their doors or merging with a larger corporation. Real estate brokerages are not exempt and will struggle as well.

As a result, competition will shrink toward monopoly and a few corporations will control various aspects of the real estate industry. This will limit consumer choices as the little guys continue to get stomped on. The public will turn the other way as the government steps in to control the banking industry, because consumers will be pushed to the brink of desperation and apathy.

Since more real estate agents will be leaving the business, the industry will weed itself of lackluster and inexperienced real estate agents.

6. Sellers Will Shun Loan Modification Programs in Favor of Short Sales

Upside-down home sellers may try to modify their existing loans but those efforts will be met with roadblocks as lenders exhaust other options. The loan modification process will be cumbersome and riddled with conflicting demands within the same banks.

Home sellers will ask themselves if they are better off selling their homes on a short sale, absorbing the hit to their credit reports and becoming renters for a few years. Many sellers will turn to a short sale or walk away than try to directly deal with mortgage lenders.

Real estate agents who specialize in short sales will see an uptick of business.

7. Banks Will Pursue Foreclosure Options Over Loan Modifications

Banks will find it is easier and less expensive to foreclose than to attempt loan modifications. It is probable that banks will decide it is more profitable for them to foreclose than to rewrite a loan. In that event, banks will prefer to make loans to new borrowers who meet rigid standards.

As a result, the number of foreclosures will continue to rise. Many 5/1 ARMs will begin to adjust during 2009 and 2010, causing more foreclosures. But consumers won't see many of those foreclosed homes show up in MLS, which will artificially reduce inventory.

Some banks will change their guidelines to allow foreclosed upon sellers to buy another home after six months.

8. Mortgage Interest Rates Will Spike

Because mortgage rates are influenced by mortgage bonds and mortgage-backed securities, not fed rate cuts, I predict interest rates could rise to 7% in 2009. Maybe more if investors continue to worry about inflation and the government adds a new supply of U.S. Treasuries to the market to offset the looming deficit.

On November 7, 2008, as I write this, the federal funds rate is 1%. It's not likely to go much lower and, in fact, will probably go up. Mortgage rates are not tied directly to the federal funds rate but that does influence its movement. Historically, mortgage rates exceeded 8% from 1970 to 1992.

So while the bad news is rates will rise, they won't surpass 8%.

9. Rental Rates Will Increase as Demand Increases

Surging numbers of home owners will lose their homes in 2009, which will turn former home owners into tenants. Some home owners will walk away from their residences, deciding that home ownership is not worth the aggravation, and return to living in rentals.

Because new construction will be at a standstill, existing inventory will serve as shelter. There will be fewer rental homes available than the demand will dictate, which will put upward pressure on rental rates. Sellers who are unwilling to take a hit on their sales prices will put their homes on the market as rentals, but that won't provide enough inventory to fulfill demand.

It's a good time to be landlord.

10. Tax Breaks for Home Selling Will be Revised

Baby boomers who hope to downsize in 2009 may get hit with an unexpected change in the I.R.S. Tax Code Section 121, if Congress revisits this tax break. The law has been exempting $500,000 for married couples and $250,000 for single people from capital gains only since 1997.

I predict that the government will try to change the home sale tax exclusion in 2009, disallowing the free money that up to now sellers have been able to pull out of their homes upon resale. Congress needs cash to refill the treasury depleted by bailouts and continuing military action.

Sellers should consult a CPA to determine the best way to avoid taxes upon resale.

 

To read more visit http://homebuying.about.com/od/marketfactstrends/ss/110708_2009-RE.htm

 

ALSO, for more information on HOME PRICE TRENDS, visit http://www.lisachapman.com/blogs/lisa_chapman/archive/2008/12/26/update-2008-home-price-trends-harvard-university-report.aspx .