With just a few weeks remaining until the end of the year, millions of Americans are seeking ways to make 2013 better, especially from a financial perspective. From making new real estate investments, refinancing mortgages, entering into reverse mortgages or resorting to a short sale, people are anxious to make all things right.
Americans Faced Tough Challenges in 2012
While American real estate was once considered a surefire investment, a housing bust and subsequent recession created a risky market. Foreclosures and short sales exploded as the result of substantial unemployment and a weakened market, affecting all aspects of the American economy.
According to the online real estate database Zillow, negative equity, meaning a property is worth less than the amount owed, lingered at 28.2 percent in the third quarter of this year. While the number did drop slightly from the previous quarter (30.9 percent), more than 14 million American homeowners with a mortgage are still underwater on their homes.
This summer, the Federal Reserve announced the median net worth of families plummeted nearly 40 percent in three years. Americans, whether they needed to sell a home or tap into home equity, have felt the effects of a challenged market.
In spite of hard times, economists foresee positive changes for 2013.
Real Estate Market Improvements Expected in New Year
Financial experts are optimistic regarding the future of the American real estate market, as home buyers begin to search for new investment prospects. Government programs are said to have helped millions of borrowers stay in their homes using various initiatives, including lowering interest rates and/or loan modifications. The chief economist at Moody’s Analytics, Mark Zandi, said he believes the foreclosure crisis is fading as home-loan delinquency rates declined this year from 1.7 million in 2009 to 1.4 million. Legal actions against lenders have also been credited in the decline in foreclosures.
Near-Record-Low Mortgage Rates Provide Boost
Economists say excellent mortgage rates will continue to strengthen the American housing market. According to mortgage buyer Freddie Mac, the average 30-year loan rate inched up slightly this week to 3.34 percent from last week’s 3.32 percent. These rates are comparable to those seen more than 40 years ago. The average 15-year fixed mortgage rate increased to 2.67 percent from 2.64 percent last week.
Builders are said to be more confident as sales of new and previously occupied properties have increased this year. In addition, U.S. home prices have risen from last year according to a report by Core Logic that showed home prices were 6.3 percent higher in October than one year ago — the largest yearly gain in six years. As prices rise, people are often more motivated to buy, as they fear prices could continue to increase.
Record-low mortgage rates have also encouraged more homeowners to refinance in order to reduce monthly payments or to tap home equity for cash. Economists anticipate consumer spending, which drives close to 70 percent of economic activity, to increase as a result.
While low mortgage rates are likely to motivate home purchasing and refinancing in the new year, the housing market is still volatile. As the result of stricter lending rules and/or a buyer’s lack of cash down payment, not all Americans will be able to take advantage of the enticing rates.
Reverse Mortgage Changes Coming in 2013
As the new year approaches, the federal government is proposing to revise its reverse mortgage program to make loans less risky for the seniors who utilize them.
Currently, seniors 62 or older who have equity in their home are able to enter into a reverse mortgage to access funds. While they are still required to pay property taxes and hazard insurance, they are not required to make monthly loan payments. Unfortunately, a great number of loans can go into default because of a combination of troubles, from an increased cost-of-living leaving little for monthly expenses to the overall reduction in real estate values.
Large lines of credit given by the private loan industry, as well as up-front lump cash sums, have made reverse mortgages more risky for borrowers as well as the federal government, which insures them through the Federal Housing Administration (FHA) insurance fund.
Earlier this year, the federal Consumer Financial Protection Bureau released a study that showed an increased number of outstanding reverse mortgage loans were at risk for default. According to the U.S. Department of Housing and Urban Development (HUD), nearly 10 percent of all active Home Equity Conversion Mortgages (HECM) were delinquent as of six months ago.
The more conservative approach proposed in the new year will include capping up-front loan draws and adding safeguards to make sure senior borrowers can meet future tax, insurance and property maintenance responsibilities by possibly creating an escrow requirement.
Short Sales Increase as Tax Break Ends
While the real estate market is slowly moving forward, it was reported short sales on homes shot up 35 percent during the third quarter from last year. Financial experts attribute the increase to the rush to finalize sales before a vital debt relief act expires. Unless the temporary 2007 Mortgage Forgiveness Debt Relief Act is extended into 2013, homeowners who sell their properties for less than the amount owed will face a tax on the amount forgiven through the short sale.
While selling a property for less than the mortgage is unfortunate as it leaves the seller without a place to live or cash to move forward, it does prevent the home from reaching foreclosure, which is positive for both the borrower and the lender. More than 1 million short sale transactions have occurred since 2009.
If the relief act is not extended, millions of people already confronting financial loss will face even larger debt levels. Financial experts warn the housing market, while heading toward recovery, has not improved adequately enough to warrant expiration of the act.
Bill “No Pay” Fay has lived a meager financial existence his entire life. He started writing/bragging about it in 2012, helping birth Debt.org into existence as the site’s original “Frugal Man.” Prior to that, he spent more than 30 years covering the high finance world of college and professional sports for major publications, including the Associated Press, New York Times and Sports Illustrated. His interest in sports has waned some, but he is as passionate as ever about not reaching for his wallet. Bill can be reached at [email protected].
- Miller, M. (2012, December 5). Federal clampdown looming on reverse mortgages. Reuters. Retrieved from http://www.reuters.com/article/2012/12/05/us-column-miller-reversemortgage-idUSBRE8B40TP20121205
- Thomas, M. (2012, December 6). Short sales on homes surge as tax break nears end. San Antonio Business Journal. Retrieved from http://www.bizjournals.com/sanantonio/news/2012/12/06/short-sales-on-homes-surge-as-tax.html
- Associated Press. (2012, December 6). Mortgage rates tick up, above record low. Retrieved from http://www.usatoday.com/story/money/business/2012/12/06/mortgage-rates/1750735/
- Fitzgerald, J. (2012, December 2). Foreclosure crisis fading. The Boston Globe. Retrieved from http://www.boston.com/realestate/news/2012/12/02/efforts-fight-foreclosure-finally-starting-pay-off/CIuIAZOvUUU3OY3Nyo15qI/story.html
- Hopkins, C. (2012, November 14). Negative Equity Recedes in Third Quarter; Fewer than 30% of Homeowners with Mortgages Now Underwater. Message posted to http://www.zillow.com/blog/2012-11-14/negative-equity-recedes-in-third-quarter-fewer-than-30-of-homeowners-with-mortgages-now-underwater/
- Mui, Y. (2012, June 11). Americans saw wealth plummet 40 percent from 2007 to 2010, Federal Reserve says. The Washington Post. Retrieved from http://www.washingtonpost.com/business/economy/fed-americans-wealth-dropped-40-percent/2012/06/11/gJQAlIsCVV_story.html