The Year Everyone Was Wrong (Again) About Home Prices

The great thing about predictions is that, after some time has passed, it’s possible to see which ones were right, and which ones weren’t.

For several years, economists and housing analysts have predicted a housing bottom, but few forecasts at the beginning of 2012 foresaw the magnitude of the rebound that the housing sector enjoyed last year. Quarterly surveys by real-estate website Zillow Inc. Z -2.00% and Pulsenomics LLC poll around 100 economists and other housing analysts on their predictions about where home prices are headed.

So how’d they do last year?

Looking back at the survey from December 2011shows that around 42 panelists, of the 94 that made their predictions public, saw prices declining on a year-over-year basis in 2012. The other 52 said prices would either rise or remain flat in 2012. Panelists base their home-price estimates on what they expect the Standard & Poor’s/Case-Shiller 20-city index to show.

Even the most bullish respondent in the late 2011 survey may have understated the actual 2012 home price gain, which won’t be tabulated and released by Standard & Poor’s until late February. Constance Hunter, the deputy chief investment officer of AXA Investment Managers, called for a 4.4% gain. In October, the Case-Shiller 20-city indexstood 4.3% above last year’s level. (By March, Ms. Hunter revised down her forecast, calling for a gain of just 1.7% for 2012).

Four other respondents predicted annual gains of at least 3% for 2012: James Smith of Parsec Financial Management; Brian Wesbury and Robert Stein of First Trust Advisors; Bill Cheney of John Hancock Financial; and Andrea Heuson of the University of Miami.

The most bearish forecast came from John Brynjolfsson, chief investment officer of Armored Wolf, who predicted declines of 10% in 2012. Gary Shilling, the former chief economist at Merrill Lynch who now runs his own economic consulting firm, predicted an 8% drop. Barry Ritholtz, the chief executive of Fusion IQ and financial blogger, and Mark Hanson, a housing consultant based in Menlo Park, Calif., predicted declines of 5% and 7%, respectively.

So what are analysts predicting for 2013?

The vast majority of more than 100 housing economists and analysts predicted in this past December’s survey that home prices will increase this year, with a median forecast of a 3% gain in 2013. The median forecast also calls for prices to rise by 23% through 2017.

Of some 96 panelists that made their predictions public, only seven believe that home prices will decline this year, and only four believe that prices will decline by more than 1%.

The most optimistic 2013 forecast came from Joel Naroff, president of Naroff Economic Advisors. He predicts a 7.2% gain for 2013 and a forecast that will see prices 39% above current levels by 2017.

The most bearish of the group is still Mr. Shilling, who predicts that prices will fall by 6%, erasing all of the gains of 2012. Mr. Shilling is forecasting additional declines through 2016 and predicts that prices will be nearly 12% below current levels by 2017.

Messrs. Ritholtz and Hanson also forecasted declines of 2% and 4%, respectively, for 2013. Both forecasters also expect that 2012 home prices will end the year up by between 2% and 3% from one year ago, even though home prices through October were already up by nearly 7% from the beginning of the year.

Mr. Hanson says there’s no disputing that home prices improved during 2012, but he says his forecast didn’t take into account the aggressive intervention undertaken by the Federal Reserve’s bond-buying programs, which pushed mortgage rates to their lowest levels in more than 60 years. He also disputes the idea that the housing market has entered a sustainable recovery.

“When interest rates fall suddenly, it enables the 72% of buyers who get a mortgage to pay 15% more for the same house on flat income,” he said in an interview. “So in a perfect world, prices should be up 10% just because of the rate benefit.”

Now, he says, the housing market faces a “wall of headwinds” due to interest rates that can’t go much lower, rising taxes, and mortgage modifications that are re-defaulting. “We had a good year in 2012 and we’re going to have a worse year in 2013,” said Mr. Hanson.

By Nick Timiraos

Housing Market in 2013: What to Expect

When the housing market imploded in 2007 and took the economy with it, experts said the real estate market would never look the same again. Now, nearly six years after the crash, the dust has finally cleared and we have a true picture of the new housing landscape.

While investors may still be leery of hopping back into the market, housing starts, prices and confidence are on an upward trend and the tide may be turning this year to favor homesellers.

Homebuyers can expect a more competitive market in 2013, and should start the mortgage lending process at least three months before they plan to start seriously looking because experts expect the process to take several months under new lending standards. House hunters should be ready to deal right away as inventory is expected to remain at low levels throughout the year.

Homesellers are shifting into the driver’s seat with experts expecting bidding wars to break out in certain markets due to the low inventory. While homes will sell quicker this year, they still have to be priced right.

“The mobility rate has been at a very low rate, meaning that people really did not move during the recessionary years, so there is pent up demand -- but sellers need to price correctly,” says Lawrence Yun, chief economist at the National Association of Realtors.

Here's a rundown of what experts expect from the market: 

Mortgage Rates and New Rules

The Federal Reserve has held interest rates steady at near-record lows over the last several years in an effort to entice buyers into the market, and experts don’t expect significant jumps in the rate this year. In fact, the central bank said it would not raise short-term interest rates until the unemployment rate drops below 6.5%.

“Mortgage rates were essentially at a generational low last year -- they could move modestly higher this year, but it will be the second-lowest [rate] in 40-plus years,” says Yun. “I anticipate by year end that mortgage rates may be close to 4%, but still one of the lowest in a generation.”

In early 2012 the nation’s largest banks agreed to put aside $25 billion in the robo-signing settlement to help fund loan and foreclosure modifications and compensate homeowners who claimed they were given unfair lending terms. Experts expect more mortgage rules to be handed down this year to help prevent reckless lending that led to the meltdown.

The Consumer Financial Protection Bureau issued new qualified mortgage standards last week that detail criteria lenders must use to determine if a borrower qualifies for a loan.

The rule states a qualified mortgage cannot include risky features such as extending beyond 30 years or include exotic terms like interest-only payments or negative-amortization payments, where the principal amount increases. Loans can’t carry fees and points above 3% of the total mortgage and limits the total debt-to-income ratio at 43% -- which some worry will restrict credit and discourage homebuyers at the lower-end of the income scale from seeking a mortgage.

Additional mortgage rules are aimed at curbing over-borrowing, but could make the process longer for potential homebuyers and could prevent some potential buyers from being able to qualify for a loan.

“The mortgage rates are very low, but only a few people are able to access that low rate,” says Yun. "A modest increase in mortgage rates may not be harmful, provided that there is a return to more normal underwriting standards.”

Housing Prices

Over the last two years the big question hanging over the market was how much lower home prices could drop, but home pricing indexes started to rise last year and are expected to continue the upward trajectory in 2013.

ncreasing home prices will bring reluctant homeowners off the sidelines and will encourage homebuyers waiting for rock-bottom prices to jump in. According to the Mortgage Bankers Association, applications for new-home loans are expected to increase 55% this year.

Earlier this week CoreLogic reported it expects home prices to jump 6% this year compared to 7.5% in 2012. Markets experiencing a stronger labor market will seeing prices increase even more. 

Housing Inventories

In reaction to the housing oversupply, housing inventories fell more than 40% across the nation since 2007 and experts say below-normal inventory will hold back sales and impede the market’s recovery in 2013 if not corrected.

If home prices continue to rise it will help increase inventories, which will bolster the housing market even more, according to Jed Kolko, chief economist from Truilia, who says housing construction is up 60% in the last two years, but is still far from normal levels.

“Rising prices… encourage developers to build more and also lift more borrowers back above water and encourage some of them to sell,” he says. “They’ve wanted to sell and haven’t been able to, but now they will start thinking about it. The biggest question is whether it means inventory will expand or shrink less than last year, this could be the year.”

In 2012, the total number of units constructed stood at 600,000, far less than what’s necessary to keep up with the demand. This year experts forecast around 750,000 units to be constructed, far less than the 1.4-1.6 million units needed.

“In many markets sellers are in the driver’s seat because of low inventories,” says Kolko. “With inventories falling so dramatically in the last year, buyers are competing for a fairly small inventory of for-sale homes and that helps sellers.”

The Fate of the Interest Rate Deduction?

This popular incentive to attract consumers to become homeowners may be on the chopping block as both Democratic and Republican lawmakers continue to look for ways to close the ballooning federal deficit and budget.

The mortgage interest deduction costs Uncle Sam nearly $100 million in revenue a year, but eliminating it could weigh on housing activity.

“Over the years one of the advantages of buying is getting that interest deduction,” says Sam Davis, a real estate agent in Washington, D.C. “When we are trying to convince renters to purchase a home we can say: ‘If you pay $1,500 a month on rent and you buy a home with a $2,000 mortgage, if you got that interest rate that would basically make the spending even, yet you aren’t getting the advantage of appreciation and the right to own your own home.”

Foreclosure Activity

According to Kolko, there are currently more than a million homes in the foreclosure process across the country, but the crisis on a nation level is over. However, he says foreclosures in the most-battered markets including Florida, Illinois, New Jersey and New York are still high, and regulators have been considering state-level foreclosure reform.

He adds that the housing price rebound is stronger in states with a quicker foreclosure process and less of a backlog, while states with a hefty backlog are holding back the price recovery.

As investors become increasingly more comfortable with the real estate market, Chris Boston, mortgage banker with the Fitz Gerald Financial Group Division of Monarch Bank, says he is seeing more people taking advantage of foreclosures and short sales. “Investors are taking advantage of the market, they are buying homes at 50 cents on the dollar and they are renovating them to where they should be, which will help the market this year.”

Refinancing Activity

Low interest rates caused a wave of refinancing in 2012, but experts forecast a much slower pace in 2013.

"Refinancing is less about helping the housing market and more about boosting the economy by reducing payments and giving homeowners more money to spend,” explains Kolko. He adds that only if rates drop further, or the eligibility requirements expand, will refi activity pick up this year.

by Kathryn Buschman Vasel

Mortgage industry fares well in fiscal cliff deal, debt forgiveness law survives

Mortgage industry fares well in fiscal cliff deal, debt forgiveness law survives

 The mortgage industry can breath a sigh of relief with the final fiscal cliff deal bringing back a popular tax break on mortgage insurance premiums and debt forgiveness for borrowers who go through a short-sale or some other type of debt reduction.

A topic that is still up for discussion and likely to surface later in the year is whether the popular mortgage interest tax deduction will be part of a long-term deficit reduction plan.

Still, the deal passed by the Senate and House on Jan. 1 is one that leaves room for hope in the housing market.

The American Taxpayer Relief Act of 2012 apparently extends a law that expired at the end of 2011, which allowed for the deductibility of mortgage insurance premiums, according to a research report from Isaac Boltansky with Compass Point Research & Trading. The law now applies to fiscal years 2012 and 2013.

"The law dictates that eligible borrowers who itemize their federal tax returns and have an adjusted gross income (AGI) of less than $100,000 per year can deduct 100% of their annual mortgage insurance premiums," Compass Point said.

"Certain borrowers with AGIs above $100,000 may benefit from the deductibility as well but are subject to a sliding scale. The tax break covers private mortgage insurance as well as mortgage insurance provided by the FHA, the VA, and the Rural Housing Service. In 2009, about 3.6 million taxpayers claimed the mortgage insurance deduction," the research firm added.

One of the more watched provisions of the fiscal cliff was the Mortgage Forgiveness Debt Relief Act of 2007, which was set to expire on Dec. 31.

The fiscal cliff deal extends it for another year, meaning homeowners who experience a debt reduction through mortgage principal forgiveness or a short sale are exempt from being taxed on the forgiven amount.

"The amount extends up to $2 million of debt forgiven on the homeowner's principal residence," Compass Point Research & Trading said. "For homeowner's to qualify, their debt must have been used to 'buy, build, or substantially improve' their principal residence and be secured by that residence. The law, which was passed in 2007 with a 5-year sunset provision, will now be in effect until Jan. 1, 2014."

Another minor win for housing is a provision tied to the government's plan to increase the capital gains tax rate from 15% to 20% for individuals who earn more than $400,000. While in theory, this is harder on higher-income homeowners, Compass Point sees a silver lining through an exclusion.

Compass Point notes the law "states that only gains of more than $250,000 for individuals ($500k for households) are subject to taxes on the excess portion of capital gains. Point being, in order for an individual homeowner to be impacted by the increased capital gains tax rate they would need to have an adjusted gross income above $400,000 and gain more than $250,000 from the sale of the property. Since this exclusion threshold remained intact, the impact of the capital gains tax increase is limited."

By Kerri Ann Panchuk