The drop in the latest pending home sales index got a lot of press attention, but that blip downward shouldn’t be your guide on what to expect for real estate in 2010.

The 16 percent decline in November pending sales from October’s unusually high index was due almost entirely to buyers’ behavior confronting what they thought was an expiring tax credit.

In October the pending sales index went off the charts. Buyers were scrambling to sign contracts before the $8,000 credit program expired at the end of the month.

In November, buyer behavior was just the opposite. When Congress extended the credit through next April 30, the pressure was off. Nobody needed to rush to sign contracts.

Not surprisingly, the November index hit the skids.

Meanwhile, even November’s pending sales number was a solid 16 percent above November 2008. That suggests that even without the extra incentive provided by the credit, the home sale market is gaining strength for its own fundamental reasons: huge pent-up demand, low prices and great financing.

But keep this in mind: Those fundamentals are dynamic – and buyers and sellers need to stay on top of them as they change in the weeks ahead.

For example, as we’ve noted before here at Realty Times, with the economy climbing slowly out of recession, and the Federal Reserve expected to throttle back on its mortgage securities purchases , interest rates are now trending upwards.

Last week’s thirty year average fixed rate for new mortgages hit 5.2 percent, according to the Mortgage Bankers Association. That’s still very low by historical standards, but it’s up nearly a quarter of a percentage point just since mid December.

Fifteen year fixed rates averaged 4.6 percent — a rise of one third of a point in the past few weeks.

Home prices are also beginning to trend upward in key markets, according to the latest Case-Shiller home price index. In San Francisco and Minneapolis, the index is up by about 15 percent since the low point earlier in 2009, according to an analysis by Bespoke Investment Group.

The same analysis found the Case-Shiller index up 8.3 percent from last year’s low point to the latest month in metropolitan Washington DC, 7.6 percent in San Diego, 7.2 percent in Denver, 6.9 percent in Chicago and Phoenix, 6.8 percent in Dallas and 6.1 percent in Boston.

With reports of fewer layoffs plus significant new gains in manufacturing outplut and retail sales don’t be surprised to see prices-and mortgage rates — continue to rise in the months ahead.

Realtytimes.com

Savvy investors are always the first to jump in a potentially profitable housing market and a new survey indicates things are heating up.

More than 12 percent of homebuyers today plan to purchase a home as an investment, compared to less than half, only 5.6 percent, just seven months ago, according to a recent Move.com Homeownership Survey.

Foreclosure buyers account for 25.3 percent of consumers interested in purchasing a home and 42 percent of potential foreclosure buyers regard their purchases as investments, while 57.6 percent plan to live in the foreclosed home themselves.

“This latest Homeownership Survey validates what many had hoped to see in the housing markets — affordable prices and ample inventories are restoring the appeal of real estate to investors while providing opportunities for first time home buyers to enter the market,” said Move, Inc.’s chief revenue officer, Errol Samuelson.

Interest rates below 5 percent for much of the year and low home prices, which may be at or near market bottom, are also bringing investors back to the fold.

The new and improved home-buyer tax credit, no longer just for first time home buyers, can also be a boost for those taking the practical approach to investing by buying their own home first.

The survey of 1,004 consumers, conducted from October 16 to 18 this year, found:

• Foreclosure buyers are confident they will profit from discounted purchase prices, as well as healthy appreciation rates over the next five years.

• Most foreclosure buyers, 58.2 percent, expect to pay 20 percent or less than market price for a foreclosure, while 38.5 percent expect a 25 percent or greater discount.

• Expectations are high — 73 percent expect their properties to appreciate ten percent or more in five years, 28 percent expect their purchases to appreciate 20 percent or more.

Given the current market of flat and falling home prices, that may sound like high hopes, but RealtyTrac.com explains that lenders want to unload overhead-heavy inventories of repossessed and foreclosed home.

That forces lenders to list their homes below market and offer properties at a discount, giving the buyer some built in equity.

• Foreclosure buyers intend to convert their foreclosures into rentals (13.2 percent), fix them up for re-sale (11.3 percent), or house a family member until the home can be sold at a profit (17.4 percent).

In some markets, especially resort and vacation rental markets, where rents are higher, conditions bode well for investors who want to enjoy positive cash flow as they wait for equity to build.

“If you find a well priced property located in a healthy rental market and are able to manage and monitor the property and maintain a positive cash flow from the onset for a unit used strictly for income purposes, rather than being held with the expectation of price appreciation, this could be a good time to become a landlord,” said Nancy Osborne, chief operating officer of Erate.com, a Santa Clara, CA-based financial information publisher and interest rate tracker.
Broderick Perkins

The decimated housing market may get considerably worse before it gets better, according to housing-industry professionals, who expect foreclosures and home-price declines to continue pressuring the sector through at least the first half of 2010.

The biggest problem will likely be a flood of inventory hitting the market from rising foreclosures, says Bob Curran, a managing director at Fitch Ratings. With a mountain of specialized adjustable-rate mortgages, known as option ARMs and Alt-A mortgages, slated to reset over the next 12 to 18 months and unemployment projected to hit 10.5% this year, the number of homeowners defaulting on their mortgages is expected to surge. At least $64 billion in option ARMs will reset in 2010 and another $68 billion in 2011, according to First American CoreLogic, a real estate and mortgage-data company. 

At the same time, the government’s loan-modification program has been disappointing: the default rate on loans modified after the third quarter of 2008 was 61%, according to a report issued in December by the Office of the Comptroller of the Currency and the Office of Thrift Supervision. All of this is expected to trigger another wave of potential home foreclosures in 2010 and could cause home prices to fall another 5% to 10% before the market stabilizes, according to analysts and economists.

A record 3 million homes received foreclosure notices in 2009, according to Lawrence Yun, chief economist with the National Association of Realtors (NAR). He expects a similar number this year.

John Burns, president of John Burns Real Estate Consulting, is a bit more bearish, predicting foreclosure notices will rise to 3.1 million this year. Foreclosure notices include default notices, auction-sale letters and bank-repossession notices. But those notices may produce a far more damaging result than last year’s. “I think 50% more people will lose their homes to a bank this year than they did last year,” predicts Burns. 

One reason for the expected jump, he says, is that in 2009 many lenders were under pressure from the Obama Administration to postpone repossessions until loan modifications could be made. However, many banks didn’t have the staff to assess all their defaulted loans at the time, and he believes many of those will ultimately go into foreclosure in 2010.

Adding to the sector’s woes — the Federal Reserve has indicated it plans to end a program that’s helped keep mortgage rates at attractive levels for home buyers. The Fed program, which involved purchasing up to $1.25 trillion in mortgage-backed securities backed by Fannie and Freddie, will expire on March 31. Rates have already started to inch up in anticipation of the change, with the average 30-year fixed-rate mortgage surpassing the 5% mark in December.

Since the housing market’s peak in July 2006, home prices have plunged 30% on average, with prices in some markets, such as Las Vegas, Phoenix and parts of Florida, falling more than 60%. NAR’s Yun estimates home-equity losses from the housing meltdown totaled $7 trillion at the end of 2009.

Many housing-industry experts believe pricing will bottom soon, but the bears warn that it will probably be 2013 before the market noticeably rebounds. “The improvement that we’re going to see off the bottom will be anemic” for quite some time, says Curran.

“Some markets still have further [down] to go, but we’re definitely in the latter innings of the downturn,” says David Goldberg, an analyst at UBS. “Even if there’s another leg down, we definitely think by [late] 2010 we will have seen the bottom of housing.”

The government’s decision to extend the $8,000 first-time home-buyer tax credit to mid-2010 and expand the program to include a $6,500 credit for non-first-time home buyers will likely help lure home shoppers into the market. Also, the slide in prices is making homes more affordable. Notes Burns: “If you go to Phoenix, it’s $800 a month to buy a brand-new house,” making it more affordable than renting.

There have already been mixed signs of stabilization in price and demand. Home prices rose month over month for six consecutive months through October, according to Standard & Poor’s Case-Shiller Home Price Composite 10 Index, although prices are still down year over year. However, the most recent figures from NAR indicate that pending sales of existing homes fell 16% in November. Such mixed signals, analysts say, will be the housing market’s message for some months to come.

Time

NEW YORK (CNNMoney.com) — It appears 0% is here for the foreseeable future.

A year ago, the Federal Reserve took its key overnight lending rate, the fed funds rate, down to near 0% for the first time in its history in an effort to keep the economy from falling into depression.

The cheap money meant lower rates for consumers on credit cards and home equity loans, as well as for many business loans.

The threat of a depression is widely acknowledged to have passed and most economists believe the economy has begun at least a modest recovery. But the Fed hasn’t moved the rates since, and experts don’t think they’re likely to do so for the foreseeable future, perhaps not until 2011.

Fed funds futures on the Chicago Board of Trade, which track the key rate, show investors aren’t betting on a hike anytime next year.

Part of that is because of talk from Fed officials. Fed Chairman Ben Bernanke, named Time’s Person of the Year on Wednesday, has repeated frequently that one of the problems of the Great Depression was that the Fed raised rates too quickly when the economy first showed signs of life, causing a second, much more painful downturn that extended the Depression for years.

Economists say they think the chairman and many other policymakers are willing to wait too long to raise rates rather than risk hiking too soon.

“I think they’ll leave the taps open as long as possible, until they’re absolutely certain the economy is back on track,” said Anthony Michael, head of fixed income for asset manager Aberdeen’s Singapore office.

In recent statements issued after policy-making meetings, the Fed keeps cautioning that it expects economic conditions “likely to warrant exceptionally low levels of the federal funds rate for an extended period.”

That language is widely expected to stay in place when the central bank concludes a two-day meeting Wednesday.

But leaving rates at such levels is not without significant risks.

Low rates can sow the seeds of inflation, which can eat into workers’ earnings and squeeze budgets. It also has been blamed for the fall in the value of the dollar versus other major currencies, such as the euro, which in itself can limit Americans’ buying power.

Beyond that there are concerns that cheap rates can feed asset bubbles. Many blame the Fed’s decision to leave rates at its previous record low of 1% for 12 months from June 2003 to June 2004 as a major factor in feeding the housing bubble. The low rates caused builders to overbuild, lenders to make riskier loans seeking better returns, and consumers to use the cheap credit to buy homes they ultimately would not be able to afford.

While another housing bubble is not likely, some are now worried about bubbles in U.S. stock and bond markets, as well as in some commodities such as gold. The Standard & Poor’s 500 has gained 64% since it hit a low in March.

All those fears have prompted some in the market to argue the Fed risks falling behind the curve if it doesn’t raise rates sooner rather than later. But others dismiss those fears.

“Am I worried about the Fed being behind the curve in raising rates? At this point I want to make sure there’s a curve,” said David Wyss, chief economist for Standard & Poor’s. He said a rebound in hiring could prompt the Fed to move as early as next summer.

But others think the Fed will wait until it sees both a pickup in consumer spending and inflation warning bells.

“The consumer is not a viable spender right now and won’t be throughout most of 2010,” said Jeffrey Burchill, chief financial officer for business property insurer FM Global. “If you’re not seeing spending, it’s going to be difficult to raise rates even if there’s early signs of inflation. Similarly, if you see spending but without signs of inflation, there’s no need to raise rates.”

While economists think there’s a chance the Fed could raise rates late next year, few would be surprised to see them stay on hold all the way through 2010. A survey of 48 top economists by the National Association of Business Economics foresees rates at current levels through the first quarter of 2011.

Part of the reason is the Fed has done so much more than simply cut rates to nearly 0% in an effort to spur the economy.

It has bought more than $1 trillion in mortgages in an effort to keep rates low and spur home sales and building. It also has bought hundreds of billions of Treasurys and debt issued by mortgage finance firms Fannie Mae and Freddie Mac. And it has offered a number of other programs designed to jumpstart lending to small businesses and consumers.

Many believe the Fed will have to sell a significant portion of those assets into the market before it is ready to raise rates

“There are too many things that have to happen before the Fed is in position to (raise rates) again,” said Kevin Giddis, managing director of fixed income at investment house Morgan Keegan.

By Chris Isidore