The value of real estate will likely continue it's slow and steady decline throughout 2012. Here are ten large scale predictions that may have a negative impact on home values in the near future.
Larger Down Payment Requirements
The government and mortgage industry both agree that increasing down payments can help prevent future losses. Forcing buyers to invest more of their own hard earned cash towards the purchase price may prevent them from falling under water on the mortgage or defaulting and abandoning the home as easily as it was in the past. The government wants it raised as high as 20% across the board while the mortgage industry is pushing for more risk-based terms, meaning the lower a person's credit score is, the higher their down payment should be and vice versa. Regardless of who gets their way, as mortgage defaults continue to rise it becomes more likely that 5%, 3%, and 0% down payments will soon be a thing of the past.
Eliminating the Mortgage Interest tax Deduction
The government no longer wants mortgage interest to be tax deductible, making it that much more expensive. This has always been a family's largest write off and without it they will receive significantly smaller tax returns every year and place a dampener on the yearly economic stimulus that the tax season provides our economy with. It would no longer be advantageous to purchase property for tax shelters and buyers will become more aware of how much interest is being tacked on to the mortgage. This triple threat of more expensive loans, buyer awareness, and smaller tax returns will have a devastating ripple effect throughout our economy.
Tighter Lending Standards
Obtaining a mortgage is the top concern among buyers and for good reason. The entire financial landscape is changing but none more rapidly than the mortgage industry. They have been backed into a corner and placed under a microscope as defaults continue to rise leaving them no choice but to accept some of the changes taking place in this financial overhaul. As they tighten up their lending standards the mortgages are quickly becoming more expensive every year in efforts to recoup previous losses and to prevent further ones.
Mortgage expenses can be broken down into three parts. The initial costs are the fees that combine to encompass the loan origination, title work, and closing costs and every year they go up in price a little bit. After the purchase, borrowers face increases in ongoing costs such as loan servicing fees, interest rates, taxes, home maintenance, mortgage insurance premiums, and other insurance like home, flood, hazard, and personal injury coverage. The back of the loan is no different with costlier late fees, higher fines and legal fees for defaulting, potential liens, and even refinancing losses its benefits as it become costlier to do so.
The Mortgage Forgiveness Debt Relief Act of 2007-2012
It's been five years now and a greater portion of the public still remains unaware of its benefits. It prevents underwater home owners from paying taxes on the difference between the amount of money they owe on the property and the amount of money it sells for. After it expires, those who sell their homes for less then what they owe the bank either in a short sale, foreclosure, or other means will owe the I.R.S. a staggering amount of money. Imagine that John Doe is in a 25% tax bracket and his house sells for $100,000 less than he owes the bank. The one hundred grand is now considered taxable income and the tax return he thought he was getting now becomes the largest bill he's ever received.
If the public becomes aware of this, all of those people living in the shadow inventory of foreclosures will rush to sell their homes before year's end 2012. This will push a massive amount of short sales into a market that's already saturated with distressed properties. Picture all these homeowners rushing to sell their house first so they can evade the return of the tax man to avoid getting hit with that outlandish bill. Real Estate values would just plunge in a manner that could never have been perceived.
Unemployment Remains at Record Highs
It's likely that rates will continue hovering just above 9% nationally and may even dip into the double digits in some areas of the country. Even though some jobs are being created it's hardly enough to offset the amount of jobs that are still vanishing. Too many companies may continue to go out of business, downsize, layoff, or force pay cuts. Many workers that do find new jobs most often find themselves working for less money than they were before or working two jobs just to make ends meet. Eventually entire family's find themselves without health insurance, increased health care costs, or paying for health care out of their own pockets.
One other unfortunate side effect of increasingly high unemployment rates worth mentioning is the simultaneous rise in crime rates which robs people of more than just their home values. Crimes like scrapping vacant properties, home invasions, robberies, and petty theft are skyrocketing, reducing the public's trust and confidence in their police force, weakening neighborhoods whole, and shaking entire communities to their core.
The Secondary Mortgage Market
Companies like Fanny May, Freddie Mac, Ginnie Mae, AIG, FHA, and some others that were once presumed to large to fail, may still do so. The government has propped them up for now and will continue to so with billions of more tax dollars. They will attempt to keep them solvent for as long as possible but may find themselves spending money faster than they can print it thus driving inflation into hyper inflation.
Cost of Living
Almost without knowing it, every single person is being nickel and dimed to death. The cost of almost all goods and services continues to increase ever so slightly year after year. Worse yet, other companies like financial institutions work tediously to find new and exciting ways to add more fees to the myriad of charges we face every day in our daily lives.
Home Maintenance
When pockets run thin, home maintenance easily gets overlooked. Unfortunately when little problems are left undone, they usually lead to bigger and more expensive repairs. When exterior home maintenance is neglected it's easy for everyone to see. The curb appeal quickly deteriorates and the home becomes an eye sore. Strangely enough, without ever having to sell the house, it begins to lose value and reduce the value of homes in it's vicinity.
FHA Association Guidelines
FHA guidelines are strict enough, but they get stiffer towards buying property ran by association's like townhouses and condominium developments. They stopped doing spot approvals last year and now require that everyone has to meet all qualifications. On top of that, they now have to ensure that the association has budgeted at least 10% in reserves, less than 15% of owners are delinquent on their H.O.A. fees, they must be at least 90% owner occupied, and at least 75% residential. Although they mean well, it sure makes it hard to get approved for financing in these developments.
Death of the McMansion
It didn't take long to realize that these over sized properties had over sized bills. The taxes alone were nearly equal to a mortgage payment on an average property and the utility bills were equally outrageous. Forget going green, most of the energy bill is spent supplying wasted space like vaulted ceilings, empty basements, attics, and unoccupied rooms. Shockingly, buyers soon discovered that even if their loan had the best rate in town, they were going to pay back enough interest to buy their banker a 100' yacht. A quarter million dollar, thirty year mortgage carries an interest charge of roughly another quarter million, nearly half of which gets paid back in the first ten years.
Greater Concerns
The aforementioned issues, fear of sinking home values, toxic mortgages, and reduced confidence in government or financial markets are all leading causes of today's greatest challenges. When these problems mesh together they form a downward cycle that's tough to break. They also have an economic ripple effect that can reach far beyond the realm of real estate. There is no one way out or easy solution, but time will heal all wounds, just not in a year or so.
The good news is we all love a great sale, in fact most people won't buy an item unless it's on sale, has a coupon, was discounted, or comes with a rebate. Funny thing is how media fueled fear mongering tactics have people believing that sinking home values is a very bad thing. If we get excited about saving a dollar on a soda, we should be ecstatic about saving tens even hundreds of thousands of dollars when purchasing real estate. Once this misperception dissipates the true value of real estate will become clear once more and the recovery process can commence.
Jerry Barker - Jerry Barker is a real estate agent and lending professional in New Jersey. He began purchasing properties for investment in 2002 and ...
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