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Is the Housing Market Set for a Rebound?

Some experts argue that the worst is behind us and others are predicting the worst is yet to come.

Here are a few recent reasons in support of a market recovery:

New Home Builds

• Based on a government report, new home building increased in August.  The Census Bureau reported that builders broke ground for 598,000 new homes during August, up 1.5% from a revised 589,000 in July.
• Building permits rose 2.7% to 579,000.
• The National Association of Home Builders reported their index of homebuilder confidence had risen a point to 19, its highest level since May 2008.

Resale Homes

At Loan Mitigation Advocates, part of our job is to stay abreast of trends in the real estate market.  We pay particular attention to inventory numbers and the ratio of normal sales to REO/short sale transactions.  In our local area of Northern California, inventory numbers are reaching staggering low numbers in some areas.  There have been cases of multiple offers and homes selling for more than their asking price.  We have also noticed less foreclosures and short sales coming on to the real estate market over the past few months.

On the flip side, there are some potential pitfalls in the near future that could put a damper on the recovery:

Recasting Loans, Foreclosures and Short Sales

According to CNNMoney.com, a large number of non-conventional mortgage loans, including interest-only mortgages and option ARMS, will reset over the next year or so. These resets will lead to increases in the monthly mortgage payments for homeowners. Many people will not be able to afford the increases.

The interest-only loans specifically pose a large threat.  These are homeowners who are paying only the interest payment for a fixed number of months.  Once the number of fixed months is up, the payment is based on principal and a new interest rate, resulting in a much higher payment in most cases.  There were a number of these type of loans created back in 2005 that are set to recast in 2010.

Besides the threat of interest-only loans, option ARMs could create problems as well.  The option ARM loan has provided a borrower the ability to make minimum payments every month.  Sometimes these payments are less than their monthly interest charges which tack on the difference between the lower payment and the interest-only payment onto the mortgage balance.  The problem occurs when the balance reaches between 110% and 125% of the original loan balance.  The loan will reset into a fully amortizing mortgage where monthly payments considerably rise and present a huge problem for the borrower to make the new payment.

If these borrowers do not pursue loan modifications, they could be left with no choice but to short sale their house or eventually foreclosure. All of these foreclosed and short sale homes will flood the market and increase inventory and further drive down prices.

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