Editor’s Note: this is the first in a series of articles written by the RealtyTrac editorial staff offering up our own personal predictions for the coming year. Please like or tweet these articles if you agree with the predictions, and feel free to chime in with comments whether you agree or disagree.
As 2012 comes to a close, the U.S. housing market is in recovery, and has turned a page: It looks like 2013 will start to be more “normal,” but hardly a robust period of growth.
Next year, foreclosure activity will remain elevated, but fewer filings than in 2012. Home prices will continue to rise as the number of properties that make up the distressed inventory — short sales, auctions and bank-owned REOs — shrinks. Additionally, new home sales and starts will rise in 2013.
But there’s a few housing bumps in the forecast for 2013.
1) FHA: The Next Housing Bailout
Just when it seemed that the housing bust was ending, the Federal Housing Administration (FHA), the Franklin D. Roosevelt-era agency that insures home mortgages, is experiencing a rise in delinquencies among the mortgages it insures.
The FHA backs $1.1 trillion of American mortgages, mostly made to lower income borrowers and to those with poor credit.
In November 2012, an independent audit of the agency showed that the FHA faced a shortfall of $16.3 billion as of the end of September, considerably larger than had been expected. That could force the FHA to seek a taxpayer bailout for the first time in its 78-year history.
In December 2012, a new study of 2.4 million loans insured by the FHA was released, showing a pattern of risky lending that could cost American taxpayers up to $20 billion in losses and send thousands of borrowers into foreclosure. The report, conducted by Ed Pinto, a resident fellow at the American Enterprise Institute( a conservative think tank) warns that risky loans issued in 2009 and 2010 could imperil both borrowers and taxpayers who stand behind the agency.
“If it was a private company, it would be shut down,” argues Pinto.
Pinto claims the FHA is nearly insolvent and it could require a taxpayer bailout next year. FHA-backed loans only require a 3.5 percent down payment (so borrowers have no skin in the game), and borrowers must have a credit score of only 580 out of 850. A decision on whether the FHA is bailed out by the Treasury would not come until February, when the White House releases its 2014 annual budget.
2) MID on the Chopping Block
The long-treasured home mortgage interest deduction (MID) could be on the operating table as Beltway surgeons over on Capitol Hill look for ways to trim the $1 trillion budget deficit, slicing up the popular homebuyer deduction, and sending shivers through homebuyers, investors and much of the real estate industry.
Interest paid on a mortgage is tax deductible if itemized on the tax return. So are points that are paid to lower the interest rate. Lawmakers will most likely lower the limit on mortgage interest principal eligible for a deduction to $500,000 from the current $1 million. Additionally, they will most likely remove any break for interest on a second home, turning the deduction into a tax credit capped at certain percent of interest paid.
But eliminating the sacred cow of the housing industry could endanger the housing recovery, making homeownership more expensive. Another unintended consequence is that investors with second homes or vacation rentals could dump their investment properties, triggering an overall fall in home prices. And sales in higher-priced coastal markets could stall because the hefty prices in those regions would be out reach for millions of buyers.
In Q3 2012, short sales outnumbered REO sales, according to RealtyTrac. As foreclosure filings dwindle, lenders will find more creative ways to push through short sales instead of foreclosing on distressed and underwater borrowers.
With bank-owned foreclosure inventories declining, homebuyers and investors will have fewer opportunities to buy bargain-basement foreclosures.