Now that 2009 is behind us it’s time to look forward to 2010. What’s in store for the economy and specifically the housing market? I, for one, am not overly optimistic and I’ll share some reasons why below.
I believe there are 3 primary reasons home prices should decline further in 2010:

1. Foreclosure activity will increase
2. Mortgage rates will increase
3. Tax credits will expire

FORECLOSURES- Quite frankly, without government intervention foreclosures would have been much higher in 2009. The Obama Administration’s “Making Home Affordable” program significantly slowed the initiation of foreclosure by banks. But it may have just delayed the inevitable. The program was designed to make payments more affordable through mortgage refinancing and modification, but so far the program has realized little success.

The fact is, of the 728,000 borrowers signed up for trial loan modifications, only 31,000 (less than 5%) have actually received permanent modifications. Banks have made this an extremely difficult program to navigate and not done enough to make a meaningful difference to troubled homeowners. Subsequently, many have re-defaulted on their loans.

As a result, many of the failed modifications will ultimately result in foreclosure in 2010. It’s estimated that 1 in 7 households are in foreclosure or default and 1/3 of mortgages are underwater (the mortgage exceeds the value of the home). This is not isolated to the subprime market either! The number of overdue prime mortgages doubled in the 3rd quarter of 2009. There are also a large number of Payment Option ARMs (option to pay less than the interest owed) scheduled to reset which will result in significant payment increases, and there are also predictions of increased “strategic defaults” where homeowners choose to walk away from their homes, despite being able to afford the payments, because they have negative equity. Economists estimate additional foreclosures of $2.4Million in 2010.

MORTGAGE RATES- perhaps the primary reason for what little improvement we did see in home sales from 2008 to 2009, were 50 year lows in mortgage rates. That in addition to depressed home prices created buying opportunities that were just too good for many to pass up.

The problem is the sub 5% rates were fueled by a massive government intervention via the Mortgage Backed Security (MBS) Purchase Program led by the Fed. The $1.25 Trillion commitment to purchase MBS’s is set to expire in March after being extended once already. With a decrease in foreign demand for these securities, unless the Fed steps in once more, rates will surely rise. Some predict increases of 1% or more resulting in rates in excess of 6%.

TAX CREDITS- Attractive first time homebuyer tax credits of up to $8,000 were originally set to expire at the end of November but were extended until April 30th along with an additional credit of up to $6500 being offered to some existing homeowners. This has certainly helped the struggling housing market but sooner or later it will need to stand on its own. Without another extension to this program, home sales will likely decline further.

CONCLUSION- there’s no doubt the government really had no other viable alternatives to consider. And, without the stimulus provided we would have likely seen catastrophic results. Unless, however, the economy can begin to improve independent of stimulus, banks begin to loosen up underwriting standards and start lending again, and most importantly jobs created, we may be in for even harder times.

The housing market is vitally important to the overall health of the economy and the stabilization of home prices is absolutely necessary for all this to happen. Until there are jobs created, though, homeowners will need lots of help which can only come from the government.

I believe the government will continue to provide stimulus in various forms in 2010 specifically designed to keep real estate prices from slipping further. The question is at what cost will it come? And, what new set of problems will that produce in the future?

photo by woodleywonderworks

Tags: 3rd Quarter, Borrowers, Economists, Foreclosure, Foreclosures, Government Intervention, Households, Housing Market, Initiation, Meaningful Difference, Mortga, Mortgag, Mortgage Rates, Mortgage Refinancing, Negative Equity, Obama, Option Arms, Payment Increases, Payment Option, Prime Mortgages, Subprime Market, Tax Credits