2009-2010 Real Estate Market as seen by Zillow

Apartment Vacancy Rate Highest on Record

Rents Plunge - Never before have we observed rental properties in so much distress, both on the space and pricing side.

The U.S. apartment vacancy rate rose to an almost 30-year high of 8 percent in the fourth quarter, and rents dropped in the biggest one-year slump in 2009, according to real estate research company Reis Inc.

In the fourth quarter, the U.S. apartment vacancy rate rose 0.10 percentage points from the prior quarter, and 1.3 percentage points for the year. At 8 percent, it was the highest national vacancy rate Reis has recorded in its 30 years of tracking the sector.

In the fourth quarter, U.S. asking rents fell by an average of 0.7 percent to $1,026 per square foot, the largest single-quarter decline since 1999. For 2009 asking rents fell 2.3 percent, also the largest decline in 30 years. Effective rent fell 0.7 percent in the quarter to $964 per square foot. The 3 percent drop for the year was more than three times the deterioration in 2002.

Note: the Reis numbers are for cities. The overall vacancy rate from the Census Bureau was at a record 11.1% in Q3 2009. This also fits with the NMHC apartment market survey.

A record high vacancy rate and a record plunge in rents! Anyone surprised?

And more rent declines are coming, from Nick Timiraos at the WSJ: U.S. Now a Renters' Market
Marcus & Millichap is to release a separate report on Friday that forecasts a further 2% to 3% drop in apartment rents over the next year, most of which will be concentrated over the next six months.

This is one of the unintended consequences of government policy: rising rental vacancy rates, falling rents, more losses for CMBS investors and local and regional banks, more bank failures, downward pressure on CPI (rent is largest component of CPI) ... and eventually more downward pressure on house prices as the massive government support for house prices slows (because of the price-to-rent ratio).

Foreclosure Mediation Ordered!

Florida homeowners facing foreclosure may soon get one last chance to negotiate with lenders trying to take back their homes.

The Florida Supreme Court issued an administrative order last week that requires a third-party mediation program with all new foreclosure lawsuits involving primary residences.  The goal of the order, written by Chief Justice Peggy Quince, is to help handle the state’s glut of foreclosures. An estimated 456,000 foreclosure cases statewide are clogging the court system, she said. Florida has the third-highest mortgage delinquency rate in the nation, according to the order. “The crisis continues unabated,” Quince wrote. 

The order backs a recommendation made in August by the Supreme Court’s residential task force. The court asked the task force to study the problem and offer guidance.  “I’m pleased the court recognized the need of what the task force asked for,” said Alan Bookman, a task force member and former Florida Bar president. “This is going to force lenders and borrowers to talk to each other. They may not be able to work something out, but it’s a start.”

Lenders have spoken out against mandatory mediation and said it would cause even more delays. Alex Sanchez, president and CEO of the Florida Bankers Association, told the Tribune in August that lenders already are in constant touch with borrowers and file foreclosure cases as a last resort.   Sanchez could not be reached for comment Monday.

The mediation order will be executed through the chief judges of Florida’s 20 judicial circuits. Bookman said he expects the program to be in place by mid-February.  The program requires sending all cases involving primary residences to mediation unless the plaintiff and borrower have already done so or both parties agree to opt out.  The cost of mediation is not to exceed $750, according to the order. Lenders would pay the fee initially, though they could recoup some costs if mediation fails and a foreclosure lawsuit is filed in court.  It’s unclear on what date the mediation requirement kicks in, but it does not apply to cases already in the pipeline, Bookman said.



The order likely will apply to cases filed after the chief judges sign orders for each circuit, Bookman said. However, the chief judges could assign a different date. “They could make it affective for cases filed this week, when the order was signed,” Bookman said.

Most areas of Florida continue to see a rise in foreclosure filings.  However, the Tampa-St. Petersburg-Clearwater metro area recently saw overall foreclosure filings slow. The November number dropped 9 percent year-over-year and 1 percent from the previous month, according to RealtyTrac, a California company that tracks mortgage activity.  Even so, the area has been rocked by foreclosures. The category of filings known as new foreclosure lawsuits increased in November, from 31,380 the month before to 32,276.

Thanks for the Memories Mr. Bush

It was, according to a wide range of data, a lost decade for American workers. ...

There has been zero net job creation since December 1999. ... Middle-income households made less in 2008, when adjusted for inflation, than they did in 1999 ... And the net worth of American households ... has also declined when adjusted for inflation ...

10 Things to Know About Real Estate in 2010

Is 2010 the year to buy a house? It certainly looks that way: After a steep run-up in prices during the first half of the decade, home values have plummeted back to 2003 levels. Fixed mortgage rates are sitting near record lows. And the foreclosure epidemic--while painful for many home owners--has created some wonderful opportunities for bargain hunters. If that's not enough, Uncle Sam is handing out thousands of dollars in tax credits to nearly all first-time buyers and the bulk of existing home owners who close a purchase by June.

But while the 2010 outlook appears inviting, there's one key catch. "You need to have a stable job," says Mark Zandi, the chief economist of Moody's Economy.com. The economy is showing signs of life, but the unemployment rate is already at 10 percent and expected to go higher. And while those mortgage rates are attractive, buying a house makes sense only if you can bank on your income stream. So before you consider purchasing a home, take a hard look at your job, your company, and your industry.

That said, here are 10 things to know about real estate in 2010:

1. Prices to bottom: After more than three years of falling, real estate values have shown signs of stabilization in recent months. At the national level, home prices slid nearly 9 percent between the third quarter of 2008 and the same period this year, according to the S&P/Case-Shiller home price report. That's a notable improvement from the second quarter's nearly 15 percent annual drop and the first quarter's 19 percent decline. This improvement will give way to a bottom in home prices--finally!--in 2010, but not before additional declines, Zandi says. Zandi projects home prices will hit bottom in the third quarter of 2010 after logging a peak-to-trough decline of roughly 37 percent, based on the S&P/Case-Shiller national home price index. "That means we've got another roughly 10 percent [decline] to go," Zandi says.

2. Mortgage delinquencies up: Amid falling home prices and a nasty labor market, roughly 1 in every 7 mortgages was either past due or in foreclosure by the end of the third quarter--the highest delinquency rate in the 37-year history of the Mortgage Bankers Association's National Delinquency Survey. Two factors are expected to drive delinquencies even higher next year. First, nearly 1 in 4 homeowners currently owes more on their mortgage than the property is worth, which increases their odds of default. And secondly, the national unemployment rate--which already stands at 10 percent--will peak at about 10.5 percent in the first quarter of 2010, says Patrick Newport, an economist at IHS Global Insight. Additional job losses mean more borrowers won't be able to pay their mortgage bills. "The [delinquency] rate is going to stay up there for quite a while because the job market is going to be really weak for a while," Newport says.

3. Foreclosures move upstream: The number of foreclosure sales will increase to about 1.9 million in 2010, according to Moody's Economy.com. And while we've already seen a growing number of more expensive homes heading into foreclosure, Heather Fernandez, vice president of marketing at the real estate search engine Trulia, expects the trend to pick up steam next year. (Trulia is a U.S. News partner.) "We are poised in 2010 to see a surge of foreclosures from prime borrowers. Hundreds of billions of dollars in option [adjustable rate] mortgages are set to be recast" next year, Fernandez says. Option adjustable rate mortgages allow borrowers to make lower monthly payments for an initial period, after which the payments adjust--or "recast"--higher. For some borrowers, the new payments can be more than twice their initial payments. Combined with other factors, like the loss of a job, a recasting option adjustable rate mortgage can make borrowers more likely to default. "These are [properties] at higher price points [and] potentially in more desirable neighborhoods," Fernandez says.

4. Mortgage rates to rise: Anyone who purchased a home in 2009 was presented with some extremely attractive mortgage rates. Rates on 30-year, fixed mortgages fell to an average of 4.88 percent in November, down sharply from 6.09 a year earlier. A key factor behind the plunge was a Federal Reserve program, first announced in November of 2008, that purchased debt and mortgage-backed securities from Fannie Mae and Freddie Mac. But the program is slated to expire at the end of the first quarter, and if private investors don't step up, fixed mortgage rates could jump. (The Fed, of course, could always decide to extend the program.) The unwinding of this Fed program, the improving economy, and mounting concern over government deficits could push rates on 30-year, fixed mortgages to roughly 5.5 percent by mid-2010 and close to 6 percent by the end of the year, says Mike Larson of Weiss Research. "Almost all signs to me point higher," Larson says.

5. Buyer's market remains: With prices still falling, mortgage rates remaining historically attractive, and additional homes hitting the market in the form of foreclosures, the dynamics of the real estate market will continue to favor buyers over sellers in 2010. That means those looking to buy a home next year should not feel pressured to act impulsively. "You don't need to have a sense of urgency, but understand that as time progresses the balance of power as we get into 2010 is going to slowly but surely shift away from [buyers]," Larson says. "It is not going to be a strong seller's market, but it will be more evenly distributed as the year goes on." Data from the real estate firm Zillow show that home buyers are already losing the leverage they once enjoyed. While home buyers landed a median discount of 4.6 percent off listing prices in January, the size of the gap fell to 2.7 percent by October. Expect this gap to close further as 2010 marches on.

6. Modification plan could be modified: While the Obama administration has put nearly 700,000 borrowers into temporarily restructured mortgages, it had found permanent fixes for just 31,382 struggling homeowners through November. What's more, critics have identified two key shortcomings of the government's $75 billion antiforeclosure plan. First, the program isn't much help for borrowers struggling to stay in their homes as the result of a job loss. And the rickety labor market is a key factor behind rising delinquencies. At the same time, the plan does not sufficiently address the issue of negative equity--owing more on your home loan than the property is worth--which also works to increase foreclosures. "The current modification program does not address negative equity and is therefore destined to fail," Laurie Goodman, a senior managing director at Amherst Securities Group, told a congressional committee in written testimony on December 8. "It must be amended to explicitly address this problem." Zandi says the government may move next year to overhaul the modification program in two ways: improving troubled borrowers' negative equity positions by writing down some of the mortgage principal, and helping to turn troubled homeowners into renters.

7. FHA lending standards may increase: While banks have jacked up lending standards in the face of mounting delinquencies, mortgages backed by the Federal Housing Administration--which come with a minimum down payment of just 3.5 percent--have remained accessible to a wide swath of borrowers. The FHA guarantees nearly 30 percent of new-home purchase mortgages today, up sharply from just 3 percent in 2006. But the rapid growth has occurred alongside an increase in mortgage delinquencies. As a result, the FHA's reserves have dipped below congressionally mandated levels. The development has put pressure on the Obama administration to beef up its requirements for agency-backed home loans. In early December, the Department of Housing and Urban Development announced that it would make several changes to FHA mortgage requirements: raising up-front cash requirements, boosting minimum credit scores, and perhaps charging more for insurance premiums. Additional new restrictions may be in store. Taken together, the developments could work to choke off the supply of mortgage credit to borrowers who can't get financing elsewhere.

8. Tax credit available through June: On top of lower prices and cheap mortgage rates, Uncle Sam is offering an additional incentive to get buyers into the market next year. In early November, President Obama signed a bill extending and expanding a popular tax perk for home buyers. The legislation gives qualified first-time home buyers a tax credit of up to $8,000 if they close the purchase of a primary residence by the end of June. Meanwhile, qualified current home owners are eligible for a credit of up to $6,500 when they buy their next principal residence. But while the tax perk may make a home purchase more tempting, would-be buyers should make sure they have the job security and financial wherewithal to handle the transaction before going ahead. "Don't let [the home buyer tax credit] be the thing that drives you to act," Larson says.

9. Markets will vary a great deal by region: The performance of the national housing market is much less important that the dynamics of your local market, and sales and pricing trends will vary a great deal from one area to the next in 2010. "There will be geographic pockets where the values will still continue to decline, and there will be geographic pockets where they increase," said Dale Siegel, a mortgage broker and the author of The New Rules for Mortgages. That means anyone interested in buying real estate next year can't just read the national headlines. Instead, find a good blog that covers the local housing market and consider speaking with a real estate agent with experience in the area. Check out online listings--pay close attention to pricing and inventory trends. And make sure to head out to open houses to get a firsthand feel for the market.

10. Mobile maps can help: Advances in technology have enabled would-be home buyers to increase the efficiency of their searches. For example, Zillow's iPhone app allows home buyers to see the estimated values and listed prices of the properties they pass on the street. The app, which is free, has been downloaded more than 830,000 times. Trulia has unveiled a similar product that allows users to find nearby open houses as well. "If you are sitting in a neighborhood having brunch on a Sunday, you can very easily pull up your phone [and] walk into open houses," says Trulia's Fernandez.

Dropping home values end?

Zillow, the real estate home price research company, says that the value of residential real estate ended its sickening drop in 2009. The firm's chief economist writes, "Total home values in the United States fell $489 billion in the first 11 months of 2009. A large drop, to be sure, but it marks a significant improvement from 2008, when homes lost a total of $3.6 trillion in values." Zillow says that residential real estate values actually rose in 48 of the 154 markets that it tracks.

The largest gains in home values were in Providence, Boston, and Denver. But markets including LA, Chicago, and NYC were still in trouble based on data from January through November. Zillow speculates that low mortgage rates and government assistance programs were helping real estate values.



What Zillow did not do was post any predictions for next year. Values in 2010 could begin to drop sharply again for a number of reasons: There has been some pressure on the Fed to raise interest rates if bubbles form in the equities or commodities sectors. Increased borrowing by sovereign governments, especially the U.S., could push rates higher as the demand for capital spikes up sharply, which could increase interest rates.



A number of "interest only" mortgages will reset in the next two years, and that could increase default rates as monthly payments on this type of home loan rise. Increasing unemployment could also drive up the number of people who cannot afford to stay in their homes. So far the government's program to modify monthly mortgage payments for people with financial difficulties has permanently extended to less than 1 million people. Defaults among home owners in the trial portion of this federal program are high, perhaps because people with "underwater" mortgages do not have much financial incentive to own their homes long-term.



The data on an improving residential real estate market may mask problems in the coming year.

Strategic Defaults - let the bank take the home

About 588,000 borrowers walked away from homes last year, double the number in 2007. While home prices are rising, the increases pale compared with overall drops in home prices since 2005 that threaten to push millions more homeowners into owing more than their homes are worth and seeing little chance of rebuilding equity soon.

The mortgage unit of Citigroup says one in five borrowers who defaults does so willingly, even though they’re able to pay the mortgage. “It’s a very large number, and it’s a very, very significant risk to the housing recovery,” says Sanjiv Das, CEO of CitiMortgage.

The number of borrowers who walk away is expected to increase, along with the rise in homeowners who owe more than their homes are worth. An unprecedented 16 million homeowners currently are underwater, according to Moody’s Economy.com. That’s about a third of all homeowners with a first mortgage. Moodys estimates the number of underwater borrowers will peak at 17.4 million in the third quarter of 2010. An even higher estimate comes from Deutsche Bank, which predicted that the number of homeowners underwater will grow from 14 million (or 27 percent of all homeowners with mortgages) in 2009 to 25 million homeowners, or 48 percent of all those with a mortgage, by the time home prices stabilize.

Waiting for prices to stabilize

How bad the strategic defaults issue gets may depend on how much more home prices fall and whether the government does more to help homeowners with mortgages larger than their homes’ value. The government’s current Making Homes Affordable program for mortgage modifications disqualifies borrowers whose unpaid mortgages are more than 125 percent of the home’s market value.

Nationally, median prices have fallen about 25 percent from their peak in late 2005, although prices recently have risen compared with prior months this year. The median price in the second quarter – $170,000 – was at roughly the level it was in autumn 2003. But price declines have been worse in some markets. A closely watched barometer of home prices, the Standard & Poor’s/Case-Shiller 20-City Composite Index, shows they have fallen more than 25 percent in 12 markets and more than 50 percent in two – Phoenix and Las Vegas – from peaks hit in 2006 or 2007.

Not coincidentally, strategic defaults have been highest where prices have plunged most, such as California and Florida. 

From 2005 to 2008, the number of strategic defaulters went up by 68 times in California, according to the Experian-Oliver Wyman study published in September. During that same time period, the median price for existing, single-family homes in California fell from $522,670 in 2005 to $346,410, according to the California Association of Realtors.

In other geographic regions, the increase in strategic defaulters ranged between 3 times and 18 times more.

The Experian-Wyman study found borrowers with higher credit scores when they applied for their loan were 50 percent more likely than other types of borrowers to walk away from a mortgage only because they were underwater, even though they could afford to pay. The study was based on an analysis of about 12 million borrowers.

No household would default if the equity shortfall is less than 10 percent of the value of the house, according to another study this year, done by the University of Chicago, Northwestern University and the European University Institute. But 17 percent of households would default, even if they could afford to pay their mortgage, when the equity shortfall reaches 50 percent of the value of their house. That means the market value of a mortgage property is that much below the amount of loan taken against it.

There also appears to be a contagion effect. Borrowers who know someone who defaulted are 82 percent more likely to declare their intention to do so.

Growing acceptance

Because of the time and expense involved in completing a foreclosure, borrowers who decide to walk away often wind up staying in their homes for months after they stop paying their mortgage.

In most states, lenders can go after homeowners for past-due payments, but many fail to take such action when borrowers abandon their properties, because the legal costs are so high.