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1. Will 2012 be an "expansion" or a "recovery"?
At some point, an economic recovery turns into an economic expansion. "Recovery" usually denotes a tricky phase, where the patient is still susceptible to deterioration, while "expansion" seems more of a durable expression of health. Since the recession ended some two years ago, and the recovery began, we've wandered near expansion at a couple of points, only to fall back into the more tenuous recovery mode again. Unfortunately, it seems to us that recovery is likely to be the hallmark of 2012 as the economy continues to battle various emerging issues.
2. Will politics play a role in 2012?
Probably not much. With the 2012 elections looming, it's a fair bet that little if any significant housing or finance-related legislation will make it into law. To be honest, the housing market is likely better off without any new regulations to guide it for the moment. However, we'd be surprised if there weren't a number of plans to further assist struggling homeowners offered by members of both parties, since this remains a large group of potential voters.
3. Will home sales finally improve?
We think so. We have been encouraged by the stability of home sales throughout the weak recovery. While the pace of around 4.6 million total sales is nothing to write home about, it's certainly not nothing. High levels of affordability, rising rents and a gradually improving labor market make it likely that we will see a gradual upward homebuying trend in 2012, perhaps closing in on a 5.5 million annualized pace by year end. To be fair, that would still be well below the frenzied peak of over 8 million annual sales in mid-2005, but it would also signal that recovery is taking hold.
Of course, this depends upon the continued improvement of the labor market, not a certain thing by any means. However, the still-lean job market seems better able to manage shocks at this point and might not deteriorate too much should another significant one (like the Japan crisis of 2011) occur in 2012.
4. What about home prices and foreclosures?
While we think home sales will show signs of recovery, it should stand to reason that home prices would be better supported, too. However, that's probably not going to much be the case, as least on the aggregate. Interruptions in the foreclosure stream in 2011--everything from various moratoria to the robo-signing scandal--considerably slowed the process of getting formerly-failed properties back onto the market. As that logjam breaks, we expect that there will be a fair bit of inventory coming back on line, and that will continue to pressure prices downward.
If you're considering buying a home, keep in mind that prices falling nationally (or even locally) doesn't mean that the price of a home you covet will also decline. Individual property prices are supported by the property's individual features and proximity to desirable amenities, like schools and shopping.
5. Will refinancing still rule?
While traditional refinance activity will likely continue to dwindle, refinance activity in 2012 will be supported by underwater homeowners. The recent changes to the HARP program (dubbed HARP 2.0) allow for borrowers, no matter how underwater they are, the chance to participate. Provided rates remain favorable, perhaps a million homes might have a new lower rate mortgages before the program's sunset.
6. Will the conforming limits get "re-expanded"?
We don't think so. Although the FHA maximum loan limits were re-expanded again, we don't expect that the GSE limits will follow. Mortgage rates on private-market jumbos are at or near record lows and only about a half-percentage point above traditional conforming, so there isn't a huge increase in the cost of credit as a result. So far, there is little evidence that the change from limits of $729,750 to $625,500 in the highest-cost markets has caused a collapse in home sales or prices, but the change has been in place only a few months.
If we ever hope to recreate a private mortgage market, we'll need to start somewhere, and starting with loans made to some of the best borrowers is arguably the best place to begin. Lenders are willing, even eager, to serve this portion of the market as these loans are profitable and make good additions to a bank portfolio. Also, if we are to determine if a private secondary mortgage market can ever be revived, lenders need to originate enough non-conforming products to have inventory to sell to be repackaged into private-label mortgage-backed securities (MBS). This probably cannot happen if the GSEs are garnering the majority of new loan production.
7. Are there any new regulations coming?
While housing and mortgage-related political activity will probably be at a standstill in 2012, there are plenty of agencies, regulators and bureaus hard at work to reform the mortgage industry. Chief among them is the Consumer Finance Protection Bureau, which has been busily testing new forms of mortgage disclosure documentation in 2011. We think that some of those forms will be ready sometime in 2012, but they may be phased in over a longer period. Meanwhile, Dodd-Frank continues to have existing regulators scrambling to transfer power even as they conduct necessary studies and evaluations required under the law. In 2011, a lot of discussion about mortgage risk retention and the attributes of what may ultimately be a Qualified Residential Mortgage occurred, but no final rules have come. If we don't have resolution by mid-year, this may get kicked to after the election.
8. Will we finally see GSE reform in 2012?
Probably not. We think that the issues of Fannie and Freddie probably won't even be looked at, let alone resolved, and the FHA will continue to play a too-prominent role in keeping the housing market afloat. The GSEs will continue to bleed money, but arguably at a lesser pace as older loan failures are resolved and more recent business performs solidly.
If the new HARP 2.0 program is successful, there may just be a chance that some of the underwriting restrictions and fees that the GSEs added in recent years may start to be reduced somewhat, but that's probably a bit of a long shot at this moment. The FHA's loan limits were recently re-expanded in high cost markets, and despite concerns about the program's solvency, it is likely to continue to garner the lion's share of new purchase business, especially among first-timers.
9. Will reducing debt still be in vogue?
We think so. By now, it's old news that consumers have been paring back their debts and improving their household balance sheets. With millions of successful refinances over the past few years (and possibly more yet to come), many borrowers have taken shorter-term mortgages, a kind of involuntary prepayment. However, we think many more homeowners will voluntarily pay down their mortgages in 2012, shoring up weak equity positions with the hopes of being mortgage-free sooner. Consumers are also likely to continue to trim credit card debts, too.
10. What will the Federal Reserve do?
As they are already doing quite a bit, supporting both the economy and mortgage markets, we expect they will want to do as little as possible. That said, the Fed is expected to provide more direct and explicit communication about their goals and intentions in the coming year. However, with the economy still soft, inflation fairly tame and unemployment at outsized levels, we expect to see little if any change in monetary policy in 2012, at least in terms of changes to the federal funds rate.
The Fed's mortgage-money-recycling program will come to an end mid-year. It is a modest program designed to make sure that at least some MBS have a ready buyer; in this way, the program acts as a sponge, absorbing excess MBS production if investors can't or won't. This helps to keep rates stable, and could be extended if needed.
Long before we get to any change in federal funds rate, the Fed will likely consider other ideas to manage the money supply, including paying more or less interest on banks' excess reserves, new purchases of Treasuries or other actions to enhance or tune the economy as needed.
For significant policy changes to come in 2012, we would have to be in a climate where the unemployment rate was plummeting and/or inflation was starting to soar; neither of these situations seem very likely to us.
Borrowers should know that while the Fed's commitment to low rates until mid-2013 is a promise, "low rates" doesn't necessarily mean "unchanged"; short-term rates could double or triple from today's levels and still be extraordinarily low.
Overall, there may be some more twists or tweaks to Federal Reserve policy in 2012, but much of the year--perhaps all of it--should be little changed from today's levels. Of course, decisions on policy may depend upon yet-unseen factors, such as a complete Eurozone meltdown.
11. What about mortgage and other interest rates?
Lower early in the year but higher later is our expectation. As noted above, the Fed should largely be on hold for 2012, so low short-term interest rates will persist throughout the year. Longer-term rates--including fixed mortgage rates--will likely find it easier to move upward than downward at times. We may test new record lows should the Eurozone troubles intensify, or a significant economic downturn ensue, but it seems more likely to us that the U.S. will manage a pattern of modest economic growth with a moderate inflation profile. Any credible set of plans to address the troubles overseas would tend to see money sheltered here head back home, and that would tend to nudge interest rates higher.
With so many unknowns, it's hard to forecast an entire year's range for interest rates, so a wide range is called for; we think HSH.com's FRMI will trend between 4 percent and 5 percent for the year. Before you think that's a huge range, consider that 2011 had rates as high as 5.33 percent at one point (more than a percentage point less at their bottom). That one-percentage-point range was seen in Conforming 30-year FRMs, too, which should wander in a range bounded by 3.85 percent at the bottom to perhaps 4.85 percent at the top.
12. Are there lurking threats to the recovery and this outlook?
Yes, at least one substantial one. If there is one big "if" hanging over much of this outlook, it's what happens in the Eurozone. The crisis has yet to be fully addressed, although it is finally getting some much needed attention. The promises of available liquidity by central banks is valuable to address the effects of the problems, but the problems themselves--sovereign entities too broke to make payments on their debt--remain unresolved. Banks around the world have billions in exposures to these debts, and losses from "haircuts" could topple a number of them. Unfortunately, some of that seems likely to occur, and worse, the solution for governments living beyond their means comes in the form of austerity programs, which tend to slow economic growth to a crawl. As a result, recession in a number of countries seems a distinct possibility. In turn, that would tend to slow our own economy, where exports are helping to produce enough heat to keep a new downturn from forming, at least for now. Slower growth in China may also produce some drag, although the central bank there is already taking steps to prop up growth.
For more, read HSH.com's 2011 Outlook.
A 25-year expert observer of the mortgage and consumer debt markets, Keith Gumbinger has been cited in thousands of articles covering a wide range of consumer finance and economic topics in outlets ranging from the Wall Street Journal to the Bottom Line newsletters. He has been a featured guest on national broadcasts for CNN, CNBC, ABC, CBS and NBC television networks and has been heard on NPR and other national and local radio programs. Keith is the primary researcher and writer for HSH.com's MarketTrends newsletter and has authored or co-authored a number of consumer guides on mortgages, home equity, refinancing and more.
