For upside down property owners, 2009 was a year of frustration and hype with little if any assistance. 2010 will likely be the same. Two key factors have become clear: 1) the unwillingness of lenders to cut principal balances for existing owners; and 2) the lack political will of our government to force any such cut. Back in 2008 when Hope for Homeowners was first ballyhood across the nation, the concept was that lenders would make more money by reducing existing loan balances and keeping owners in their homes than they would make if they foreclosed and put the property back on the market as an REO. The problem was that lenders disagreed. Lenders believed they would be better off getting what they could now and getting the property in the hands of a more financially stable owner. With loan modification failure rates running over 50%, there could be some validity in that belief. When President Obama was elected in 2009, he gave us the Obama Real Estate Recovery Plan the most valuable tool of which was the proposed Chapter 13 Bankruptcy Reform which would allow Federal judges to “Cram Down” principal values if the lenders wouldn’t. Unfortunately, the Senate wouldn’t go along and so the Plan failed. Instead, the government put forth the “Home Affordable Modification Program” which to date has produced very few home saving modifications.
So what to expect in 2010? Here are my predictions:
1) For Existing Property Owners - Government will continue to tinker with the HAMP program to try to get more lender cooperation. The key obstacle will remain principal reduction. As lenders continue to refuse to make cuts, pressure is building to re-introduce the Bankruptcy cram-down legislation. Look for increased lender cooperation with HAMP to avoid the cram-down but it will likely be too-little, too-late to avoid large scale foreclosures in 2010;
2) Foreclosures - As of the new year, there are over 400,000 homes in pre-foreclosure nationwide, over 125,000 in California alone. Without an effective modification program, more owners will realize that it is time to move on and will either walk-away or attempt a short-sale to minimize credit and tax damage.
3) Short Sales are the Market - For 2010 and probably for several years after, Short Sales will become the primary means of transferring homes. Lenders have managed to stabalize prices by holding back on foreclosures and listing REO’s but there is a tremendous backlog of upside-down properties that need to be dealt with. Short Sales offer both seller and lender the best solution. The big obstacle - lender demands for recourse against the seller - is changing. Even BofA has dropped their recourse demands. Short Sales will be the path to market recovery although don’t expect prices to start climbing. Right now inventories are low so there has been some upward price movement due to supply and demand. As lenders get their short sale act together, and Realtors become more effective at negotiating and packaging these deals, more properties will come onto the market. Though this will keep prices down, more properties will be sold and we’ll all get through this housing bust faster.
4) Commercial Real Estate - the big unknown - in 2010, our attention will shift away from upside down homes (that issue is being resolved) and will turn to fears of business collapse and loss of jobs. According to commercial broker, Grubb & Ellis, we’re approaching the highest vacancy rates since the dot com bust, with office vacancy reaching almost 20%. With banks still fearful of lending and individuals fearful of spending, this double-whammy put more and more companies out of business and with them went a loss of jobs that has continued the downward spiral. While few expect that these conditions will create a Depression-style generation of non-spenders, clearly the debt-fueled spending of pre-2006 is over. Bob Bach, senior vice president and chief economist at Grubb & Ellis put it clearly: “Retailers and owners of retail real estate will need to adapt to a ‘new normal’ in consumer attitudes that may last for some time, including more conservatism and attention to value as households rebuild their savings.”
2010 PRESENTS NEW OPPORTUNITIES - So what should you do going into 2010? Get good advice. We are in a changed economy that is going to be with us for a long time. If the only economy you’ve known is the “go-go” days before 2006, get educated. Our economy operates on booms and busts which generally happen every 8-10 years. You cannot simply sit on the sidelines and wait for things to get back to where they were. They won’t…. at least not for a long time. But this new economy is full of opportunities for those willing to work hard and be creative. The US Dept of Labor estimates that more than half of all new jobs will be in in professional and related occupations and service occupations. Learn more at their website at http://www.bls.gov/news.release/ecopro.nr0.htm. I see a rise in demand for Short Sales Specialists; Consultants in real estate; and small boutique service companies providing cost-effective services to businesses. Production jobs will continue to disappear.
Lastly, I remain bullish on real estate investment despite having now gone through five down-turns including two crashes. Throughout history, real estate has been the most stable long-term investment providing both shelter and income potential. This will remain so. The danger in all investments is expecting continued growth which, if that happened, would not make it an investment at all. Investment is the taking of “risk” in pursuit of the “potential” of gain. The risk will never go away nor the potential. So my advice to you is don’t give up on investing but keep your day job.
If you have specific questions about your loans, liability, foreclosure, or any legal issue, feel free to contact me at sjbeede@bpelaw.com or call us at (916) 966-2260 for a phone or personal appointment. We offer a $200 flat fee attorney consultation to enable you to evaluate your judgment and tax risks and to plan a strategy to minimize or even avoid them.
