Top 10 Real Estate Predictions for 2010

By Elizabeth Weintraub, About.com GuideHomes Prices StabilizeI truly do not believe that home prices in the entry-level market will change much in 2010. Most markets in the country have bottomed-out. We will see slight appreciation in some cities where inventory is limited and demand is strong, but no double-digits. In other cities where foreclosures dominate the market, prices might dip a little here and there over the coming 12 months but, for the most part, the worst is over. Those 50% price drops are a thing of the past. Mortgage Refinancing Drops in HalfThe Feds have been successful at keeping the funds rate at zero to .25%, but that is an artificial suppression. Sooner or later, interest rates have to go up. When the federal government stops buying mortgage-backed securities in March, we are likely to see interest rates increase and jump above 6%. In addition, everybody who owned a home with equity had an excellent opportunity in 2009 to snag an attractive interest rate. If home owners did not refinance in 2009, it is unlikely that those home owners will flock to mortgage refinancing in 2010. In fact, I predict mortgage refinancing will drop by at least 50%. Lenders Will Require Golden Credit from BorrowersGone are the days of financing a home with bad credit. Borrowers whose FICO scores fall below 620 will not be able to obtain any type of loan. Lenders will make loans with the best terms and rates only to borrowers whose FICO scores exceed 720. Underwriters will scrutinize loans more closely than in the past. They will check to see if the borrowers own any other property, especially if a borrower is married and the spouse is not applying for the loan. Many borrowers will receive a denial from underwriting at the last minute, due to impossible to fulfill loan conditions that their loan officers did not predict. Review appraisals will become more common. The Number of Short Sales Will DoubleAs more sellers realize the benefits of short sales vs. foreclosures and gain confidence when they see that lots of short sales are closing escrow, more sellers will opt to do a short sale. Skyrocketing unemployment rates will fuel more short sales as well. When home owners are laid off, fired or their work hours are reduced, many may find they live too close to the line by relying on steady paychecks. As a result, they will be unable to continue making their mortgage payments and seek a more comfortable solution such as a short sale. Banks Will Fix-Up Foreclosures Before SellingOver the past few years, banks have been swamped with foreclosure inventory. During this time, banks have taken steep discounts to sell those bank-owned homes, due, in part, to the rising practice of foreclosure stripping. Frustrated and angry sellers who are in default sometimes blame the bank for their problems, and they destroy the home before moving out. Others are simply too broke to properly maintain the home. As a result, many bank-owned homes have been put up for sale over the years in poor condition. If the banks release too much inventory into an already overly saturated market, prices will fall. So, banks will decide to fix up these homes, paint the interior, replace flooring and update the kitchens to maximize their return on investment. Obama Will Ask Banks to Streamline the Short Sale ProcessHorror stories abound about the inevitable delays for short sales. Over the past 4 years, banks have routinely lost documents, shredded paperwork and canceled complete files without notice, which have added to the timeframes for short sale approval. With the exception of Wachovia, most banks won't even tell a prospective short sale seller how much the bank will accept until an offer is presented to the bank. As a result, I predict that President Obama will put a stop to this nonsense and make banks accountable for short sales. This will involve developing procedures such as forcing the bank to disclose how much it will accept prior to the seller listing the home as a short sale and making the bank utilize the documents a borrower has most likely already submitted for the previously rejected loan modification. Move-Up Buyers Will Stay PutThe move-up market will stay soft as home owners elect not to sell their existing homes. Home owners tend to move, on average, every 5 to 7 years. But some owners who bought a home 5 years ago may not have enough equity to pay closing costs and commissions and have enough leftover for a down payment on another home. Others with equity will prefer to wait for prices to appreciate before selling. In addition, interest rates in the jumbo mortgage market will be too high for many potential move-up buyers. With fewer move-up buyers in the marketplace, that void will leave first-time home buyers as the driving force. Builders Will Enter Market With More CautionFrom 2000 through 2005, builders were having a hay day. They could build subdivisions hand-over-foot and sell those homes within a reasonable period of time. Builders also built many homes on "spec." Now, I predict builders will not build a home unless the builder has a buyer ready to buy that home. Builders will want to ensure a profit before taking on more liabilities. To better protect profits, builders will also build smaller homes on smaller lots, which they can sell for less than a larger home on a larger lot. Increased density will pay off big-time for new home builders. Smaller, less expensive homes will appeal to first-time home buyers and those hoping to downsize. Lenders Will Let Sellers Immediately Buy a New Home After a Short SaleFor many years, sellers who completed a short sale were penalized in the same way that those who went through foreclosure were restricted from buying another home. In 2008, Fannie Mae began to realize that sellers who completed a short sale deserved to be rewarded for their efforts over those who elected foreclosure and changed its guidelines to allow a short sale seller to buy again after 2 years had passed. For FHA, the seasoning period is 3 years. I predict that FHA will allow short sale sellers who were current on their mortgages to buy again immediately in 2010 by obtaining an FHA loan. After all, those sellers proved several important points to banks. First, they were never in default and paid their mortgage payments in a timely manner. Second, they sold their homes instead of walking away. These sellers should not be prevented from buying another home, and FHA will make that happen, providing FICO scores are at an acceptable level (probably above 620). Real Estate Sales Will Slump by Mid-SummerThe first-time home buyer tax credit was extended in 2009 through April 30th of 2010, providing the sale closes by June 30th. Second-time home buyers may also qualify for a tax credit, although a bit less. Both tax credits expire on June 30th and are unlikely to be renewed. As a result, interest in buying a home will wane. Those who were induced to buy primarily due to the home buyer tax credit will make certain that they enter into contract by April 30th. There is no tax credit offered to buyers after that date. This will cause a mid-summer slump in sales, especially when interest rates rise because the Feds will stop buying mortgage-backed securities in March.