The 2011 Housing Market Outlook: Unsettled, Underwater and Unsold

Given the importance of the housing market to the nation's balance sheet, it's no surprise that many observers are looking for any evidence that prices on family homes have finally bottomed out. For those watchers, Nov. 2 had a bit of good news: The National Association of Realtors reported that its index of sales agreements for previously occupied homes rose 10.4 % in October.

But that positive statistic must be placed in a longer-term context of declining prices, bulging inventories of unsold homes and ongoing legal improprieties in the nation's foreclosure machinery. And against that background, the NAR's news doesn't feel all that impressive.

The rise in sales agreements is also clouded by reports that new-home sales fell 8.1% in October to a seasonally adjusted annual pace of only 283,000, a near-record low, while existing-home sales declined 2.2% to an annual rate of about 4 million. In the third quarter, home sales tumbled 25% to a 4.16 million seasonally adjusted annual pace from the previous three months, a rate that was 21% below the 5.28 million clip of 2009's third quarter.

Some real estate analysts foresee another three years of price declines as the massive inventory of underwater and foreclosed homes is slowly sold off, and we need look no further than the basics of supply and demand to understand why: Analysts estimate that as many as 12 million more properties will be put up for sale over the next few years. If about 4 million homes are sold annually, then it would take three years to clear the backlog.

Homeowners in a Money-Losing Position

The so-called "shadow inventory" of unsold homes -- bank-owned properties that are being held out of the market by lenders -- is also rising. Though banks have sold around 700,000 foreclosures in the past nine months, that is down 25% from last year's sales. Analysts from Morgan Stanley estimate that the number of bank-owned and foreclosure-bound homes that have yet to hit the market is close to 8 million.

In light of this imbalance between supply and demand, some real estate observers expect house prices to fall another 8% from current levels.

Nearly one-quarter of all U.S. homeowners with a mortgage -- 11 million borrowers -- owed more than their homes were worth as of June 30, according to real estate analytics firm CoreLogic. Another 2.4 million borrowers had less than 5% equity in their houses and would likely lose money on a sale after paying broker fees and closing costs.

Given the millions of homes in the foreclosure pipeline, it's little wonder that prices are falling in most markets. Demand for foreclosed properties fell off a cliff in the third quarter, providing more evidence that housing appears to entering a second leg down after prices and sales recovered in 2009 and early 2010.

Home Equity Still Way Down

According to the Federal Reserve's most recent Flow of Funds Report, homeowners' equity is down about $6 trillion from the 2006 top in real estate prices. While the recovery in home valuations boosted homeowners' equity from a low of $6 trillion up to $7 trillion, homeowners' equity as a percentage of home values is still down from a high near 60% to 40%. Since one-third of American homes are owned free and clear, most of that equity resides in homes that are unencumbered by mortgages.

Home mortgage debt has slipped modestly from $10.5 trillion to $10.15 trillion, largely as a result of lenders' write-downs in short sales -- where homes are sold for less than the mortgage owed and the bank accepts the loss -- and foreclosure auctions.

So, while the recent recovery in sales and prices has lifted homeowners' equity somewhat, households have still lost $6 trillion in equity, and one-quarter have no equity at all and owe more on their mortgages than their homes are worth. Household mortgage debt is still close to the levels reached at the peak of the housing bubble.

Foreclosure Woes and Tightening Standards Cloud the Market

Though lenders insist they have restarted foreclosure proceedings with more careful attention to due process, a host of legal actions are calling that claim into question.

In one recent case, U.S. Bankruptcy Court Judge Judith H. Wizmur rejected a foreclosure claim on the home of John T. Kemp of New Jersey, ruling that his mortgage company had failed to deliver the note to the trustee as required when it sold the mortgage. That may leave the new trustee, Bank of New York Mellon, with no standing to foreclose, and the ruling casts doubt on the legality of many, many other foreclosures.

Other legal battles have erupted over short sales as the primary mortgage holders have been stymied by lenders holding second mortgages who refuse to sign off on sales that give them little of the proceeds.

Meanwhile, real estate attorneys are poring over thousands of records, scanning for serious errors which could negate foreclosure claims by lenders, while holders of mortgage-backed securities are pushing banks to buy back improperly transferred mortgages.

As my colleague Abigail Field reported for DailyFinance, thousands of Pennsylvania foreclosures are now in doubt due to the questionable practices of just one foreclosure processing firm.

Modifications Are Working Only Half the Time

The market of possible buyers has shrunk as well. As the Federal Housing Administration has guaranteed more mortgages in recent years, the default rate on FHA loans has skyrocketed. In an attempt to stem this rising tide of foreclosures, lenders have raised their minimum credit score on FHA-insured loans to 640 from 620. That will exclude about 6 million people from the pool of potential homebuyers, according to FICO, which created the formula for the ratings.

With over 9% of prime mortgages now in default, it's especially troubling to industry observers that the loan modification programs designed to save households from future defaults are experiencing redefault rates of 50%, meaning half of the households that receive mortgage modifications end up defaulting again within a year.

Add all these factors up, and it seems likely that the housing market will remain unsettled in 2011.

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Mortgages can be a minefield, from first time buyers to buy to let mortgages, it is necessary to do your research first so you can compare the market and compare the mortgages on offer. Review Centre offers reviews of users experiences to help you decide what mortgage company has the best mortgage, rate or application process.

July 03 2013 at 12:54 PM Report abuse rate up rate down Reply

"Loan Mod's" I talked to a small bussiness man today who got a Temoary Loan Mod Lower payments for 14 months and at the end of that time was told "you do not gulify for a reguley Loan Mod and your payments will be $ 3,000 + a month.

THEY GAVE THE HOUSE TO CHASE....................

January 06 2011 at 2:26 AM Report abuse rate up rate down Reply

Well, everyone has, or at least needs to have a place to live. Fortunately, I was in a position to pay cash (savings) for my home in early 1994. So, having a home without a mortgage, the decreasing market values do not bother or impact me. Having an "affordable home to live in" is the key to being somewhat secure. Home market values are somewhat like playing the stock market; the only thing that counts is the selling price compared to the purchase price when one goes to sell, if an whenever that might be necessary. In the meantime, the changing housing market values are impacting our economy as a whole. All of that fraudlent boosting of home market prices, bad mortgages, etc. has devastated our economy. So none of can escape the impact of that. The quicker all of this, including the foreclosures, are resolved, the sooner our economy can be stabalized and recovery can begin. The foreclosures and modified property values is just a critical part of the recovery. The sooner it is accomplished, the sooner thing can begin to get better; but that is going to take 5 years or a decade or more.

December 08 2010 at 8:11 AM Report abuse rate up rate down Reply

Rather interesting and revealing: many of these homeowners took out equity loans to buy new cars, go on lavish vacations, etc. It was THESE homeowners, and no one else, who BOOSTED the mortgages on their properties. Then when the boosted mortgage amounts was substantially higher than the adjusted marekt values, they just decide to walk away from it all; and many of them probably filed or plan to file for bankruptcy. This is nothing less than CREDIT FRAUD, isn't it?These people certainly do NOT deserve any type of "assistance or bailout". If anything they should be prosecuted for credit fraud. in my nice middle class neighborshood i Pembroke Pines florida, in the early 1990s the homes in our HOA development originally sold for $150K to $200K. Then at the peak of the economic boom, these houses were selling for $420K to $530K. On our block of 12 homes, many of the original homeowners "cashed out" and sold their homes. Now the new buyers at those higher prices are in way over their heads . . . of course they all bought with ARMS or Interests ONLY mortgages. Out of the 12 houses on our block, 3 are in some form of foreclosure, and one is listed for a short sale. That is a pretty high foreclosure rate of 25% just on our block; but it is probably the worst situation in the entire community. So, why do I and the others who lived prudently within our means have ANY OBLIGATION or basis to have to pay higher taxes to "bail out" these foolish people who bought these expensive homes because the nothing down mortgages were chaper than renting which would require a first, last, and a security deposit? Those who bought what they could not afford do NOT deserve ANY type of "assistance".

December 08 2010 at 8:00 AM Report abuse rate up rate down Reply
2 replies to BHarrison2's comment

True for some, but not for many. I have always been a responsible spender. Last year we started trying to sell our home after my husband's company was starting layoffs (he took a job in a another state that has better pay and better benefits). Because of all the trouble, we cannot sell- no one is buying. Our home is beautiful, we are selling very low, but still no buyers. Eventually we will just leave this home, I think, as I do not want to sit here away from my husband for another 3 years. I cannot rent it, and it cannot sit empty-we live on a very troubled border spot, the house would be gutted. Well, we keep trying. The only 2 offers we have had fell through because the people ended up having not told the truth about their legal right to be in this country. Sigh.

December 11 2010 at 12:07 PM Report abuse rate up rate down Reply

I do not blame most of the people in trouble, even if they overspent. This is human nature. I blame the politicians who used falsely low interest rates to push the economy, politicians that pushed salle/freddie to buy loans that were crazy, politicians that implied we would guarantee these institutions. Both parties are to blame in my opinion. It bothers me we have many of these same people that created the problem still in place. I feel for the many people who are trapped, but modifications only distort the market and are not effective use of money. Many people will eventually face bankrupcy and (hopefully) can restart again, and the countries growth will happen again. Let's all be honest-the recession really started in 2000 with the tech bubble. We tried to stall the recession and each mini cycle is getting worse. we lost a decade and are looking at another. We lost real jobs (was perot right on the ******* sound?), the middle class is under attack in all aspects- good jobs, pay, health care, taxes etc. Inflating the economy will make the debts easier to pay, but take from anyone who tried to save a few dollars( again, middle class will suffer more than rich. As prices and interest rates go up, everything will be unaffordable. real estate will drop further. How do we reverse this? make these easier, resulting in socialism, or free market, with acute real pain. either way, i am no longer optimistic no matter who is power.

April 08 2011 at 10:01 AM Report abuse rate up rate down Reply

I live in FL. They are giving homes away. I saw this coming 3 yrs. ago. It's too late for me to sell my apt. & get out-I own it with no mortgage. I am trapped, unless I want to take a 200K bath. New home sales-your kidding. New condo units never lived in from 3 yrs. ago, they can't give away. Noone is building. They are auctioning off condo units for taxes unpaid. The bank and the condo get nothing for THEIR liens. It stinks and I did not need to be reminded by reading this article. Hard to believe my home value is going to sink another 20%.

December 08 2010 at 6:14 AM Report abuse +1 rate up rate down Reply

Looks like Obama will turn off the far left and start to cozy up to the GOP in order to really have a grasp on economic recovery---so far the past two years have proven the failures of Progressive thought in attempts to salvage te economy.

December 08 2010 at 2:20 AM Report abuse rate up rate down Reply
Penny Jim

I will say it again. Loan Modifications are a lie. If you want to know why they are a lie and why most modifications lead to another default by homeowners it is simple. Loan Modificatiovs are for the banks benefit only. Most of the modifications involve adding 8% -11% to the amount you already owe. You save $100.00 a month more or less and you owe $11,000.00 or $20,000 more on a house that is declining as much as that each year. At the end of this housing mess (so called Loan Modification)the banks have the ability to charge you (add on)the amount you saved on your payments.

December 07 2010 at 10:42 PM Report abuse +1 rate up rate down Reply

cyber should be embarrassed to be such a drooling idiot. America has come to it's senses. Put down the crack pipe, cyber, and come to yours.

December 07 2010 at 10:27 PM Report abuse rate up rate down Reply

This tomgold on here knows nothing about what Bush did are you kidding me. Bush was handed a surplus and almost totally bankrupted the country and handed it off to Obama to repair his damage. Tom really read a book try and educate yourself.

December 07 2010 at 9:41 PM Report abuse +1 rate up rate down Reply
4 replies to crimson00king's comment

Shame on the GOP and their supporters and they call themselves American. Pitiful behavior even for Republican standards. Risking our national security by borrowing more money from the Chinese just to give rich more tax breaks. Nothing but pure extortion. I will be willing to bet that when the younger voters return to the polls 2012 they will be sending a clear message to the GOP and Obama and the few Democrats that have sold out the majority of this country. Make sure you contact your senators congressmen and the White House and let them know how you feel it takes mins. to just e-mail them your thoughts.

December 07 2010 at 9:38 PM Report abuse +1 rate up rate down Reply
2 replies to crimson00king's comment

Not on your life. Dumbercraps are poison.

December 07 2010 at 9:56 PM Report abuse rate up rate down Reply

Just like an anti-American looney lib to dis grass roots America. We'll take our country back.

December 07 2010 at 9:58 PM Report abuse rate up rate down Reply