Predicting trends during the most volatile housing market in American real estate history is no easy task. We strongly believe these are the five real estate items we should keep an eye on in 2012:

1. Buyers Will Return

In 2011, a lack of consumer confidence in the overall economy dramatically impacted the housing market. Buyers were afraid to make a purchasing decision on any big ticket item. By the end of 2011, consumer confidence began to return and sales increased. Economic conditions will continue to improve throughout 2012 and consumer sentiment will solidify. Once that happens, home buyers will realize that now is the time to buy.

2. Foreclosures Will Increase

The ‘shadow inventory’ of foreclosures which has been growing since the robo-signing challenges of late 2010 will finally be introduced to the market. Distressed properties sell at discounted prices. They will impact the housing values of the non-distressed homes in the area.

3. Prices Will Soften

As more and more foreclosures come to market, there will be greater downward pressure on the values of houses in the region. Foreclosures impact values of non-distressed properties in two ways:

• They will eat up some of the buyer demand in the market.
• They will impact the appraisal on ALL transactions in the area.

An increase in foreclosures will have a negative impact on values. This will cause more homes to be underwater.

4. Short Sales Will Increase

As mentioned above, we strongly believe that home prices will soften through at least the first half of 2012. Falling prices will force more homeowners into a position of negative equity. Negative equity is one of the triggers that cause people to strategically default on their mortgage obligations. If this happens, there could be an increase in the number of foreclosures. However, we predict that banks will take preventative measures which will help many of these homes avoid foreclosure by easing the requirements in the short sale process for both homeowners and real estate professionals.

5. Great Agents Will Be VERY Successful

Real Estate professionals who have invested the money, time and energy to truly understand what is happening and why it is happening will separate themselves from their competition and do very well this year.

Those who take that next step of learning how to simply and effectively communicate the market to their clients will be seen as industry leaders. These experts will dominate their markets.

This blog will help you with the what and the why. If you are looking for help with how to communicate this information to clients and customers, go here.

This week we are posting the best blogs of 2011 by category. We hope you enjoy them as much as you did when we first posted them. – The KCM Crew

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We are again honored to have Ken H. Johnson, Ph.D. — Florida International University (FIU) and Editor of the Journal of Housing Research as our guest blogger. To view other research from FIU, visit http://realestate.fiu.edu/. - The KCM Crew

Does the presence of a cluster of subprime mortgages in a neighborhood lead to a greater likelihood of foreclosure in that neighborhood among other non-subprime borrowers?  This question must be on the minds of many.  If you live in a neighborhood with a significant number of subprime loans, you are most certainly wondering if the presence of these loans will increase the likelihood that your property will be foreclosed upon.  If you are a lender with a portfolio of loans that are in close proximity to subprime borrowers, you are most probably speculating on their impact on the chance that their presence will lead to foreclosures on your loans.  If you are a politician and you supported the expansion of credit to less than perfectly qualified borrower in the interest of expanding home ownership, you are most certainly interested in the answer to this question.

The worry is that too many foreclosures caused by the presence of subprime borrowers will lead to lower neighborhood prices resulting in otherwise healthy loans going “under water” and resulting in their eventual foreclosure.  This seems like such a critical question.  You have to wonder why no one has attempted to answer it.  Well someone has but few know about it. 

Specifically, Agarwal et al[1], in a forthcoming paper in Real Estate Economics, address this very question.  In fact, they find that the presence of a cluster of subprime loans does not increase the chance that other neighborhood properties will fall into foreclosure.  They do, however, find that the local presence of a cluster of the most aggressive hybrid ARM products and low/no doc loans (a subclass of subprime loans) does increase the likelihood that other nearby properties will fall into foreclosure.

Implications

The mere presence of nearby subprime loans does not in itself appear to impact the chance of foreclosure.  However, a clustering of interest only ARMs and low/no doc loans does hurt everyone’s chances of falling into foreclosure.  This is mostly likely occurring because prices in these latter neighborhoods are not holding up in the face of nearby foreclosures.  So, the results appear to be mixed.  While most can breathe a sigh of relief, those that: (a) live in neighborhoods heavily populated with hybrid ARMs and low/no doc loans, (b) hold loans in these same neighborhoods, and (c) politicians that supported the availability of these wildly unconventional loans have to worry about the fallout.  Clearly, the first two groups face the potential of future financial loss; however, it remains unclear how politicians who supported “a house for everyone” will have to ante up.

Endnote

[1] Agarwal, S., B.W. Ambrose, S. Chomsisengphet, and Anthony B. Sanders.  Thy Neighbor’s Mortgage: Does Living in a Subprime Neighborhood Affect One’s Probability of Default?  Forthcoming in Real Estate Economics.

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