2011 Predictions for Homeowners

predictions for homeownersOften, the media looks at real estate and mortgage in terms of market dynamics and how they impact buyers and sellers. The fact is, homeowners who have no immediate plans to sell actually outnumber those other consumer segments.

Here are some predictions for what the market will hold for homeowners in 2011:1. Principal-Reducing Loan Modifications Remain Elusive

Principal reductions--loan mods that forgive some of the outstanding loan balance that a homeowner owes on a mortgage--have long been the Holy Grail of the loan modification world. Upside-down homeowners literally stand with noses pressed against the bakery window, salivating at the anecdote of a friend's cousin who got his loan balance reduced. Or the news reports that come up every six months or so, saying that the Obama administration/the banks/Congress/Fannie Mae/Freddie Mac/FHA is (again) urging/considering/hearing testimony in favor of widespread principal reduction programs.

Walk away from the window, folks--despite the rumors, Internet posts and magazine articles touting all the advantages (to banks and homeowners) of principal reductions. And despite the proven efficiency of principal reductions in preventing foreclosures and discouraging homeowners from strategic default.

And despite the fact that the Obama administration and the Treasury Department have urged the Federal Housing Finance Agency (an independent group which runs Fannie Mae and Freddie Mac, the quasi-governmental mortgage giants which control over half of first mortgages in America) to start reducing principal balances. (Only one in 12,000 Fannie or Freddie loan modifications actually reduces the principal owed!)

Most mortgage lenders and servicers, as well as Fannie, Freddie and the Republican Party, are uber-resistant to loan write-downs. Though economists argue that foreclosure-avoiding principal reductions are actually beneficial for both the banks and the housing market in the long run, none of these entities want to take the immediate hit to their balance sheets that would arise from a serious principal reduction program.

So, homeowners who have been holding their breath for the banks to snap out of a delusion (that people will keep sinking their hard-earned paychecks into underwater homes and start forgiving principal) should, well, exhale. It won't happen on a widespread basis anytime soon.

2. Staying Put, Remodeling and Walking Away Become More Attractive

Unless you're in one of a baker's dozen of real estate markets where home values are or will soon begin recovering (due to economic growth in other sectors), or you're in the enviable position of having ample equity or assets to sell your home (notwithstanding flat or declining market values), those homeowners who would like to be sellers in 2011 will probably take one of three alternatives.

Many will simply stay put and be content, happy to be in a position to make their monthly payments and not be severely upside down.

Others will stay put and get to work transforming their existing home into one they want. They'll take advantage of low prices on construction services to remodel, upgrade and even add square footage to transform their "home" into their "dream home," without any of the drama which now seems to be inherent in home selling, mortgage qualifying and moving.

Owners who are facing big-time negative equity will increasingly walk away from their homes in 2011. As the housing "crisis" seems to drag on, so that slightly declining values begin to take on the patina of being the new normal, rather than a temporary waystation back to bubbleicious appreciation, homeowners in states where home values are still declining will simply stop making their mortgage payments, tuck that cash into their savings or retirement accounts and walk away from their homes when the bank forecloses.

A recent study found a 17 percent increase in homeowners' willingness to consider strategic default when their homes became underwater--over just a six-month period of time. As the stigma attached to foreclosure diminishes, homeowners increasingly will become more concerned with stabilizing and securing their financial futures and making sound financial decisions--even if it means walking away from their largest, albeit toxic, asset.

3. HOA Members See Their Units' Values Decline Due to HOA Issues

America's multi-family complex homeowners' associations (HOAs) are in trouble. This will cause masses of condos and townhomes that are part of HOAs to decline in value--sometimes dramatically--in 2011.

What's the root of the problem? There's no one issue, but rather an (im)perfect storm of circumstances that combine to make condos and townhomes very difficult for buyers to finance and, accordingly, for sellers to sell. When homes are tough to sell, their value drops. And in an HOA, the units which are on the market or which sell for decreasing prices set the value for similar units which aren't even on the market.

This means that if you own a unit in an HOA which has any or all of the following, your unit's value might very likely decline in 2011--notwithstanding other market factors which affect all homes:
  • high HOA dues-delinquency rates
  • low owner-occupancy rates
  • a high number of bank-owned properties (which tends to jack up both of the above)
  • it lacks the FHA/HUD approval required for prospective unit buyers to obtain an FHA loan

And unfortunately, this is a perfect snowstorm, as these factors cause a decline in value, which tends to cause more owners to strategically default on their mortages, taxes and HOA dues, creating even more of the above problems and worsening the decline in unit values, complex-wide.

4. Paying It Off Becomes the New Infinite Refi

A few years ago, when home values were skyrocketing and mortgage money flowed freely, homeowners got in the habit of refinancing their loans as perpetually as a Josh Groban CD plays at Starbucks.

Many a "get rich with real estate" book and infomercial encouraged Americans to forget even trying to pay their homes off and, instead, constantly pull cash out of their abodes to buy investment properties and fund other strategies of widely varying advisability. This house-as-ATM model, of refinancing on an endless loop, funded many a family's vacation, new car, orthodontia and even college tuition.

But when the music stopped in this game of mortgage musical chairs, millions of homeowners were caught with no equity, increasing mortgage payments and no jobs with which to pay them. Thus began the rebirth of the American Dream to not simply own your home in deed, mortgaged to the hilt, but to truly own it--free and clear.

In 2010, when interest rates hit historic lows, many homeowners took the opportunity and refinanced their 30-year-loans into 3.8 percent(ish), 15-year fixed rate loans. Even though it meant that their payments increased somewhat, it allowed them to accelerate their progress toward a newly popular goal of paying their home off entirely--especially before they retire.

In 2011, the trend will be for homeowners to set up and implement plans targeting the early payoff of their home loans: less through formal refinancing (as increasing interest rates make that less attractive), and more through strategies (like starting side businesses, or taking second jobs to pay more toward the principal and painless plans of paying every two weeks, which results in an extra full principal payment every year).
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