One year ago, I wrote: "Even the best possible 2012 won't get us halfway back toward normal." That turns out to be true, but barely: the latest Trulia Housing Barometer, for October, showed us that the market is 47 percent back to normal. And this year, we launched the Trulia Price Monitor -- which revealed back in March that asking prices were on the rise -- one of the earliest indicators of the home-price recovery. All in all, the housing market enters 2013 with strong tailwinds, but that could change.
OUT: Will Home Prices Bottom? IN: Will Inventories Bottom?
The big question this year was whether home prices had finally hit bottom. We now know the answer is a resounding "yes." Every major index shows asking and sales prices rising in 2012.
The key question in 2013, though, is whether prices will rise enough so that for-sale inventory -- which has fallen 43 percent nationally since the summer of 2010 -- will hit bottom and start expanding again. The sharp decline in inventory was a necessary correction to the oversupply of homes after the bubble, but now inventory is below normal levels and holding back sales, particularly in California and the rest of the West.
Real Estate 2012: The Year Housing Finally Bounced Back
2013 Housing Market Trends: What Will Be Different Than 2012
After more than four years of sputtering, home prices finally bottomed out in 2012, most experts agree, and U.S. homes are expected to gain more than $1.3 trillion in total value by the end of 2012, said listing service Zillow. About 1.3 million homeowners with negative equity -- owing more on their mortgages than their homes were worth -- were lifted out of it by housing-price gains as of the second quarter of 2012, CoreLogic reported.
That should spark more home sales: Homes not trapped under bloated mortgages are easier to sell, and price increases also should spur demand among homebuyers looking to buy while prices are still low.
Mortgage interest rates slid ever downward in 2012, reaching historic lows week after week. Rock-bottom rates helped nurse the recovery by luring more buyers into the housing market and spurring millions to refinance.
The main reasons for low mortgage rates: The Federal Reserve purchased billions in dollars of mortgage-backed securities (bonds comprised of mortgages) specifically for the purpose of lowering mortgage rates; and U.S. Treasury rates, which mortgage rates are closely linked to, fell.
Treasury rates dropped because investors spooked by the turmoil in the European financial markets sought a safe place to store their money -- treasury bonds. The Federal Reserve also put downward pressure on treasury rates by purchasing billions of dollars in them.
The market continued to clear its once-bloated supply of homes, which had swelled during the housing boom. The drop in inventory is a major reason home prices began to rise: Buyers bid up prices because they had fewer homes to choose from. October's inventory of existing homes represented a 5.4-month supply, according to the National Association of Realtors. That was a whopping 21.9 percent lower than in October 2011 and a six-year low.
After a year and a half of negotiation, government reached a settlement in February 2012 with major banks over alleged foreclosure fraud. The lenders are alleged to have illegally foreclosed on thousands of borrowers by forging names on paperwork, a practice dubbed “robo-signing,” among other offenses.
Under the $25 billion settlement, the lenders agreed to provide at least $17 billion in relief to distressed homeowners. The settlement’s monitor reported that, as of Sept. 30, the banks had extended $26.11 billion in relief to 300,000 borrowers.
The Obama administration acted aggressively in 2012 to try to strengthen government relief programs, expanding the Home Affordable Modification Program and the Home Affordable Refinance Program.
At the heart of the battle over principal reduction -- reducing the amount borrowers owe on home loans -- were Fannie Mae and Freddie Mac, which back over half of all U.S. mortgages. Some experts say that hundreds of thousands of borrowers could avoid foreclosure if Fannie and Freddie reduced principal on many of their troubled mortgages.
But despite entreaties from the Treasury, which tripled subsidies provided to investors that approve principal reduction, the government-backed companies’ conservator dug in his heels. The director of the Federal Housing Finance Administration, Edward DeMarco, claimed the program could result in losses for taxpayers (who effectively own Freddie and Fannie). Obama has nominated a replacement for DeMarco, and it’s possible that a new director could institute a principal reduction program.
Short sales of homes in foreclosure are currently on pace to outnumber sales of bank-owned properties this year. Daren Blomquist, vice-president of online foreclosure marketplace RealtyTrac, said that short sales of properties not in foreclosure also accelerated, accounting for about 22 percent of total sales in the third quarter.
“This indicates that lenders are more pre-emptively approving short sales on problem loans in their portfolios rather than even start the foreclosure process,” Blomquist said.
The threat of a “shadow inventory” -- a pent-up supply of unlisted distressed properties -- has loomed over the housing market ever since the financial crisis began. But in 2012, estimates of the size of that inventory continued to shrink, falling to 2.3 million in the second quarter of 2012 from a peak of nearly 3 million in 2010, according to analytics firm CoreLogic. Experts now think that the shadow inventory is probably not going to hinder a recovery.
Investors raced in 2012 to snap up homes selling at bargain-basement prices and convert them into rental properties. Investors purchased 20 percent of homes sold in October 2012, according to the National Association of Realtors.
“Low vacancy rates and rising rental rates, along with statements by Warren Buffet, helped attract both individual and institutional investors to the single family rental market,” ReatyTrac's Blomquist said.
Home construction had limped along for years, as the housing market struggled to clear a glut of excess homes left over from the housing boom. But new home construction soared in 2012, reaching in October its highest level since July 2008, according to the U.S. Department of Commerce.
Builder confidence shot up too, suggesting that builders will continue to break ground on more homes in 2013. Experts say that declining home inventory amid rising demand from buyers is spurring a spike in construction.
"Builders across the country are reporting some of the best sales conditions they've seen in more than five years, with more serious buyers coming forward and a shrinking number of vacant and foreclosed properties on the market," said National Association of Home Builders Chairman Barry Rutenberg.
Barack Obama and Mitt Romney more or less ignored the subject of housing during their contest for the presidency. President Obama shied away from the topic because of his less-than-stellar performance at stemming the foreclosure crisis, while his Republican challenger steered clear of the issue to avoid alienating large segments of voters.
Perhaps most notably, there was practically no discussion of how to reform mortgage giants Fannie Mae and Freddie Mac. Some organizations, including Fannie Mae and Freddie Mac’s conservator, released proposals on how to wind down the two government-backed companies in 2012. It’s possible, experts say, that Congress may finally begin to tiptoe toward reforming them in 2013.
The Federal Housing Administration kept the housing market on life support during the sector's meltdown. Lending from private companies to borrowers with subpar credit came to a screeching halt after the bubble burst. But the agency continued to offer loans with small down payments to borrowers with low credit scores.
That led to a swelling participation in the market that set up the FHA for disaster. FHA-backed mortgages skyrocketed from 2 percent in 2007 to 20 percent in 2009, according to Inside Mortgage Finance, which tracks mortgage data. Today, the FHA stands behind about 15 percent.
“Every loan made in 2009, 2010 and a bunch in 2011 were underwater within 6 months,” said Guy Cecela, publisher of Inside Mortgage Finance. Now the FHA is staring at a $16 billion shortfall. But it expects to accumulate $11 billion in capital next year, offsetting a large portion of the shortfall, and is taking steps to shore up its reserves -- including selling delinquent mortgages and streamlining the sale of repossessed homes.
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Rising prices should lead to more inventory for two reasons: 1) rising prices encourage new construction, and 2) rising prices encourage some homeowners to sell. The big question for 2013 is whether today's price gains will continue strongly enough to encourage builders to build and homeowners to sell.
In 2013, the big housing-policy drama will be trying to prevent a future housing crisis rather than dealing with the last one. The Consumer Financial Protection Bureau will announce new mortgage rules in January to define which mortgages are judged to be beyond a borrower's ability to repay and would therefore trigger legal and financial implications for lenders. These rules will need to strike a delicate balance between protecting consumers from the types of high-risk loans that contributed to the last crisis and giving lenders the incentive to expand mortgage credit.
Why it matters: New mortgage rules will determine whether mortgage credit remains tight or finally starts to become more available to people who want to buy a home.
However, now that home prices are rising faster than rents in most of the largest markets, the affordability tide is starting to turn. Furthermore, prices and rents are rising in many expensive markets, such as San Francisco, Miami and Seattle, reducing affordability for everyone. Rising mortgage rates, which consumers and forecasters expect next year as the economy strengthens, would also reduce affordability in 2013.
Why it matters: Worsening affordability will put homeownership out of reach for more households -- especially in the most expensive markets.
OUT: Expanding Refinancing to Stimulate the Economy; IN: Cutting the Mortgage Interest Deduction to Fix the Budget
You might be asking, how does expanding refinancing relate to cutting the mortgage interest deduction? Both are housing policies under debate that aim to serve broader economic goals. Refinancing helps stimulate the economy because it gives homeowners more spending money, one of President Obama's priorities in 2012. Cutting the mortgage interest deduction, which costs the federal government more than $100 billion annually in revenue, would help narrow the federal budget deficit -- and the top economic priority in 2013 is dealing with the federal budget without wrecking the economy (think "fiscal cliff").
Both Democrats and Republicans are considering a cut in the mortgage interest deduction, either through capping overall deductions, lowering the rate at which deductions are taken or converting the deduction into a credit.
OUT: National Housing Policy; IN: 'Localized' Housing Policy
There are plenty of national housing issues to deal with, such as the new mortgage rules (see above) and the future of housing giants Fannie Mae, Freddie Mac and the Federal Housing Administration. But many critical housing issues are local and therefore only fixable by city or state governments.
Foreclosures are no longer a national problem: the foreclosure inventory is concentrated in states with a slower, "judicial" foreclosure process -- such as Florida, Illinois, New Jersey, and New York -- where some are calling for state-level foreclosure reform. Affordability isn't a national problem either, but it's a severe local challenge in San Francisco, New York and other big, coastal cities, often aggravated by rules that limit new housing construction.
Even some national policies, like Fannie Mae and Freddie Mac's guarantee fees and conforming loan limits, are "localized": They vary geographically to reflect differences in state legal processes or housing prices. It's a sign of recovery and return to normalcy that the national housing crisis is becoming a range of diverse, localized housing challenges.
Why it matters: Housing policy will be more tailored to local issues, and less constrained by political gridlock in Washington -- so long as cities and states rise to the challenge.
Jed Kolko is the chief economist for online listing site Trulia. This article was originally published on the Trulia Trends blog.