Happy New Year. Looking back on all that has happened over the past year in the real estate and mortgage markets and the economy in general, the good news is that it could have been much worse. The economy is still soft but is now showing signs of growth. The fears of a double dip recession have faded and the business analysts are now talking about how the deficit and inflation are our biggest long term risks. That may or may not be the case, but it always fascinates me how quickly conventional wisdom can change. There are some good signs, especially if you grade on a curve, but there are still some big concerns. Unemployment is still high, even after several months of good gains in the market the unemployment rate is still just under 10%, almost the same as it was last year at this time. The housing market is still in the dumps. In a lot of ways, we end this year very close to where we were last year at this time. Going forward, I expect that we will see the same things played out over the coming year.

Here are some of the major trends from 2010 and what the impact is likely to be for 2011:

The housing market is still a mess – Home sales strengthened in the beginning of the year aided by a home buyers credit for both first time home buyers and move up home buyers. But once the credit ended, home buyers for the most part retreated back to the sidelines. The tax credit prompted a lot of buyers who would have bought later to move up their time table and buy earlier. Home prices seemed to stabilize in the beginning of the year, but by the end home prices were dipping down again, though at a much lower pace than last year. The good news is that there are a lot of people who want to buy a home now and homes are the most affordable than they have been in years. The last few years the market has been almost entirely fueled by first time home buyers, but there is a huge base of people who own a home now but need more space and want to move up, if they can. This may be the year that a substantial number of those who have the ability to do so, will bite the bullet and make the move now. The problem here is that most homeowners don’t have the ability to take a loss on their home or are able to carry two mortgages at the same time. New home construction has almost stopped, which will help keep the supply of homes down. On the other side, the number of homes behind on their mortgage payments is at a record high, and the banks are still sitting on a huge shadow inventory of foreclosed homes. If they bring these homes on to the market in mass, prices are likely to drop again. I think home prices are close to the bottom, but we will be bouncing around at a low level for a while yet. And housing won’t improve a lot until the employment situation improves, and as a good portion of employment is based on housing, this is somewhat of a chicken and egg dilemma.

Mortgage rates stayed low all year, and are likely to stay low for the coming year – Mortgage rates ended 2009 just under 5%, and rates are almost exactly the same as we start 2011. In between this time rates dipped down to historic lows, before surging higher at the end of the year. The real question now is if the lowest interest rates are gone for good. Some commentators are forecasting that mortgage rates will fluctuate from the high 4s up to the mid 5% range, possibly higher. Most of these same commentators were predicting higher rates at this time last year, too. If the economy continues picking up steam there is no doubt that mortgage rates will rise. But that isn’t by any means a certainty. We are in a catch 22 situation where even if the economy improves, high unemployment and a tough housing market are likely to remain problems. Low mortgage rates are necessary for any kind of recovery and the Fed is doing everything they can to keep rates low. Right now bond investors are more worried about the risk of inflation down the road and the insupportable increase in debt as the Fed continues to spend money to drive rates lower. But so far inflation (outside of some commodity prices) has been non existent. As to the debt, there will be an accounting at some time and as a country we will need to reduce spending in a way that may not be politically feasible, but timing is everything. Our economy was on life support and government spending was what got us to this point. The whole basis of Keynesian economics is that as the economy recovers new growth will bring in higher tax revenues, so you spend more when the economy is down and save when it is riding high. We didn’t do so well on the saving part, but austerity now is likely to cut off the growth we are seeing. All this means that there will be a push-pull with interest rates throughout the year, but even the high range means rates will continue to be affordable.

Regulations and underwriting changes will continue to make it challenging to get a mortgage – Before the bubble popped, the mortgage industry was nearly unregulated. Most states had no licensing requirements and anyone could become a mortgage originator, no matter what their skills or background. At the height of the bubble it was just as easy for buyers to get a mortgage. If you could fog a mirror, there was a mortgage available for you. Since then tightening has been the trend, as it needed to be, but when the pendulum swings it often swings farther than it should. This has been happening on both the regulation and underwriting side. Over the last two years, the mortgage industry has been regulated with a vengeance. Some of these were needed changes like a National licensing requirement which means all mortgage loan officers have to pass a test and a background check so they meet at least a minimal standard. Other changes were well meaning, but ended up missing their objectives. The change in the appraisal guidelines was intended to make the appraisal independent of influence from the mortgage company. The unintended consequence was that it brought in a whole new entity, the appraisal management company, squeezed appraisers income, encouraged out of area appraisers to take assignments in areas they didn’t have expertise in, and made it more difficult and more expensive to get an appraisal. The new Good Faith Estimate released at the beginning of last year, was meant to make comparing loan options more transparent, but the result was the opposite. There are several new regulations on the industry due to take effect this year, and my guess is that these too will make it more expensive and more cumbersome to get a mortgage. The trend in underwriting is the same, more tightening. The changes over the past few years have largely a return to rational ways to access risk. All the loan programs that helped inflate the bubble have disappeared. Here too the pendulum is swinging far. Credit criteria is still tightening, and it is likely to stay this way until the housing market shows real signs of improvement.

I expect this year will in many ways be similar to last year. We are still in a difficult economy and we are more likely to muddle through than surge back to what we used to consider normal. But the troubled economy also means opportunities abound. With home prices down and mortgage rates low, i have worked with a lot of home buyers over the last year who couldn’t have dreamed of buying a home before but are now celebrating their first year in a new home of their own. The economy won’t recover over night, but it will recover. At some point supply and demand will balance out and home prices will rise. For now, homes and mortgages are more affordable than they have been in years.

You can trust in us to get the job done right.

Peter Thompson 630-479-6424

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