What the Bears See
As we consider the array of possible scenarios for the timing of a full-blown housing recovery, the most optimistic estimate seems to be 2012. That is the first year in which most of the adjustable-rate mortgages (ARMs) written during the final days of the housing boom will have adjusted for the last time. ARMs typically adjust for three or five years then freeze for the remaining portion of a 30-year term. Those homeowners with ARMs who manage to stay current on their payments through those (mostly upward) changes in their interest rates which end in 2012 will likely be able to go the rest of the way without missing payments, provided the economy does not suddenly take a turn for the worse.
During the current housing bust, those holding ARMs and interest-only loans have experienced the highest rates of default on their mortgages. And the theory goes that with fewer bad loans out there pushing people into foreclosure, the housing market will be able to begin to burn off its massive supply. So I put this optimistic notion to the esteemed housing market consultant John Burns of John Burns Real Estate Consulting, Irvine, Calif. He said he was bearish.
Burns noted that the interest resets on thousands of ARMs will indeed end subside in 2010, but those final resets represent really only the beginning of the possible default process for homeowners. If the rate changes in 2012 and they realize they cannot make their payments, it takes roughly two years from that point before the home goes into foreclosure, pushing the final wave of defaults into 2014.
Burns says the nearest historical comparison to the national housing bust today are the regional busts experienced in Southern California and Houston in the early 1990s. In both places housing slowed by 80 percent, almost exactly what we are experiencing today nationwide. And recovery did not happen overnight, says Burns, but progressed at a 10 percent annual clip over several years. Opportunity today lies mainly with those who have a strong balance sheet and can take on land at excellent prices.
The more bullish camp, among which I am one, is not focused on the national picture but rather the thousands of local and regional markets where housing supply is low. I am also a big believer in historical trends that show economic progress being made during presidential election years – 2012.