It’s a new year and a new decade and while the passing of a year is normally a time for optimism, this year there are an awful lot of people who couldn’t wait for the last one to end. This has been a time of great change, and the real

estate and mortgage markets have been at the epicenter of these changes. Low interest rates and easy money blew up the real estate bubble, and when this popped, it was the trigger which nearly brought down our whole economy. So what lies ahead for the economy? How about the real estate market? How about the direction of mortgage rates? My crystal ball is still kind of foggy and no one knows for sure what will happen, especially in the longer term, but there are several trends shaping up which will have a big impact on anyone looking to buy a home or get a mortgage in the coming year, and years to come.

Here are some things to watch out for:

1. Real estate sales will be off to the races in the first part of the year, and slow to a crawl by the end – This year is going to get off to an exceptionally fast start for several reasons. First you have the home buyer’s tax credit extension which covers purchases agreed to by April 30^th and closed by the end of June (The tax credit now covers not only first time home buyers, but also move up buyers who have been in their homes for at least five years. First time home buyers can get a credit of up to $8,000 and it is $6,500 for move- up buyers). Factor in that the Spring market is typically the strongest time of the year for home purchases (first time home buyers get their tax refunds) and rates are still near all time lows (for now), and you have a recipe for an explosive market in the early months of the year. Sales will be frontloaded but die down after the tax credit expires, as the market in move-up homes remains slow.
2. Foreclosures and short sales will still dominate the market – There is a lot of pent-up demand with home owners wanting to sell their homes and move up to something that better fits their current needs. That isn’t going to happen though until the inventory of foreclosures and short sales comes under control. I don’t see that happening this year. As long as unemployment remains high, foreclosures and short sales will be a problem (the programs to stop foreclosure will continue to be ineffective) and these distressed properties have price advantages over normal re-sales, so they will sell first.
3. Unemployment will remain high all year – If you look at where we are now compared to a year ago, we’ve come a long, long way. The economy is improving, but it isn’t going to be back to normal (or what we considered normal) any time soon. This is an election year, so there will be a real push to get a new jobs program going, but businesses are reluctant to hire, banks are slow to lend and consumers are saving more than before, so we are going to slog through this rather than have a quick pickup.
4. Government will continue to borrow and spend, and the system won’t end – the government has been on an unprecedented borrowing and spending spree. This is obviously something that can’t go on forever, but unlike so many of the critics that think this is the end of the world and putting us on the road to disaster, I think this was a reasonable response to a crisis. There is no doubt that a lot of this was mishandled, but the government stepped in with their spending because they were the only ones able to. Big business still isn’t leading the way, small business can’t get financing and consumers are still lying low. So this trend will continue throughout this year, at least. But in spite of this, China and the rest of the world will continue buying our bonds, and we will keep our normal system in place.
5. Mortgage rates will go higher, but not out of sight – Mortgage rates are almost surely going up, whether the Fed raises short term rates, or not. The big factor now is that mortgage interest rates were kept low over the past year through a Fed buying spree of mortgage backed securities. They initially committed to buying $750 billion of mortgage bonds, then upped the amount to $1.25 trillion. They’ve already spent about a trillion of that, and the program is set to expire at the end of the first quarter. The speculation is that the Fed backing has trimmed somewhere around half a point off of rates, so once the Fed stops buying (or whenever the markets factor this in) rates are going to move higher – unless some other buyers come in to take their place. Also, the government appetite for new debt pushes rates higher, and if the economy starts gathering steam, rates will go higher still. I expect rates to rise, and think that this Spring (early) will be the best opportunity for getting a low rate for a long time to come. But even when rates rise, they’ll still be in an affordable range. The Fed and the government in general have a vested interest in keeping rates low, the economy will backtrack if rates go up to much. Besides, it’s an election year. So the government will pull all sorts of levers in order to keep rates affordable.
6. Inflation will stay under control – The markets constantly worry about inflation and despite all the noise about how hyper-inflation is just around the corner, so far the inflation readings have hardly budged. There is still a great amount of excess capacity in the economy (more was produced than what we needed during the boom years, and we have way more supply than we do demand). With unemployment as high as it is, and asset prices still low, inflation is likely to remain tame all year, at least.
7. Home prices will stabilize, but bump along the bottom – Demand for homes should be strong, at least in the first half of the year, but home supply is growing just as fast. The biggest problem is distressed homes, which will continue to grow as long as unemployment is high. The big banks are sitting on a lot of inventory which hasn’t come onto the market yet, which will keep prices low. And if the real estate market does start building up a head of steam, there are a lot of home owners, many of them in homes too small for their present needs, waiting for prices to move up enough so they can sell. Put this all together and home prices are likely to stop falling, at least here in the Chicago area, but they aren’t likely to rise.
8. Government will continue to increase regulations, and guidelines will continue to tighten – Here we are at the start of the year and we are rolling out a new Good Faith Estimate form, new HUD1 closing statement, new FHA regs and appraisal guidelines, a loan originators licensing requirements and … the list goes on. The mortgage industry was under regulated for a long, long time and the regulators are now playing catch up. The goal behind these regulations is to increase transparency and help the consumer, but the changes are coming so quickly and even the experts are now confused about how to implement these changes. Instead of making it easier for the consumer, the law of unintended consequences is kicking in and some of these changes are making things harder to understand and restricting consumer’s options. Still, we have a big mess on our hands, and I expect that the regulations will continue to come.
9. There will be fewer places to go for mortgage financing – When the market was riding high, the mortgage business seemed like the place to be. The amount of mortgage companies and mortgage loan officers almost tripled from the year 2000 to 2006. The business seemed easy then since there were loans which required no income or assets and nearly everyone was a prospect. This situation attracted people who had no idea what they were doing, and it led to a lot of abuses. The market has swung completely around, and in order to stay in business, you need to know what you are doing.  Companies and loan officers will continue to leave the business, but those who remain in the business will be the best and regulations will require they know what they are doing.
10. Some private money will start coming back into the market – One of the biggest trends over the last 2 years is how the only loans available were the ones that could be sold back to the government (FHA, Fannie Mae and Freddie Mac). Jumbo loans (those above the $417,000 conventional lending limit) are the biggest casualty of this trend. Home prices are now down to the point where some private lenders are starting to dip their toes back into the market. I think the Jumbo mortgage market will finally start to recover this year, though the spread (the difference in rates between conventional and Jumbo loans) will be much wider than it used to be to make up for the extra risk. This still won’t be a big slice of the market unless more move up buyers are able to sell their homes.

The net result of all these trends is that we are in for another year of muddling through. There won’t be any quick recovery, but odds are we aren’t going to take a dive again, either. That being said, I do think this is going to be one of the best times to buy a new home for years to come. The key to any real estate purchase is that it has to meet your needs now, and in the future. Real estate is a long term investment. The cycle will make its way back around eventually, and I expect the home prices and interest rates available today will look like once in a lifetime bargains a few years from now.

Peter Thompson                              630-479-6424

Illinois Mortgage Rates                   First time home buyer loans

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