Fiscal Cliff, Slow Progress Darken Housing Forecast: UMD Expert

       Fiscal Cliff, Slow Progress Darken Housing Forecast: UMD Expert

PR Newswire

COLLEGE PARK, Md., Dec. 19, 2012

COLLEGE PARK, Md., Dec. 19, 2012 /PRNewswire-USNewswire/ -- After its greatest
collapse in 80 years, the housing market appears to be bottoming out with
stabilizing home prices and many markets experiencing price gains. Still, "it
may be premature to call this a 'real recovery,'" says Cliff Rossi, Tyser
Teaching Fellow and executive-in-residence for the University of Maryland's
Robert H. Smith School of Business. "Looking into 2013, the 'fiscal cliff,'
regulatory reform and other factors could put a drag on markets through the

Despite historically low interest rates, potential buyers face a lot of
questions before jumping in on what is their largest investment. For sellers,
conditions continue to build on 2012's nascent recovery. But will credit be
readily available for first-time and repeat homebuyers? Will there be
additional efforts to help struggling homeowners under water on an existing

Gauging the Market

The Fed recommitting to low interest rates through 2013 should yield one
bright spot in below-4-percent mortgage rates. Coupled with continued shedding
of debt and increased savings by consumers, mortgage affordability will remain
high based on home prices increasing 4 percent between the third quarters of
2011 and 2012.

Still, the average home price remains well below its 2007 peak. Its continued
recovery hinges on increased credit availability, plus a continued decline in
vacant homes and continued growth in the economy and employment, says Rossi,
who has held senior risk management positions with likes of Citigroup, and
Freddie Mac and Fannie Mae.

But the economy is expected to remain sluggish – as signaled by the Fed's
December announcement to continue purchasing mortgage-backed securities and
Treasuries, he adds. "In that case, demand would curtail and home prices would
increase 2-3 percent instead of four."

Momentum for Sellers

The glut of properties in distress or in foreclosure continues to decline,
2.6-to-2.3 million (10.2 percent) in the past year, leaving a six-month shadow
inventory supply. "Couple this with a continuing decline in new-building
activity, and the gap between demand and supply should continue to narrow,
helping to further stabilize home prices and reducing the time it takes to
sell a home," Rossi says. "New home permits and housing starts were down last
year and new home inventories were at record lows."

Another sign of a shrinking supply backlog is the decline in vacancy rates,
now at 2.1 percent. The rate, normally about 1.5 percent, peaked at 3 percent
at the height of the housing crisis. "With 1.5 million housing units needed to
accommodate population growth and household formation, the 600,000
single-family and multifamily units built last year clearly put less pressure
on supply," says Rossi.

Prospects for homeowners looking to sell should be "at least as good as 2012,"
Rossi concludes. "But don't look for it to revert to a seller's market any
time soon. And since all housing markets are local, your home may sell faster
if it is in a desirable location, on a good commuting route and has
exceptional curb appeal and amenities."

For Buyers: Tight Reins on Borrowing

As credit remains accessible to borrowers with strong credit history, stable
income and employment, "expect to bring a 10-20-percent down payment to the
closing table – or more – as lenders continue to maintain high underwriting
standards for this important risk factor," Rossi says. "And with recent FHA
trouble caused by its insurance fund showing an actuarial loss, there may be
fee increases and tighter lending standards ahead for first-time buyers."

The market in 2013 also could absorb the effects of government plans to reduce
the impact of Fannie Mae and Freddie Mac, he adds. "This could spell higher
fees and rates for borrowers. And with new rules from the Consumer Financial
Protection Bureau defining the characteristics of qualified mortgages, some
tightening in lending standards may also occur."

'Fiscal Cliff' Factor

The wild card is the "fiscal cliff" – the end-of year legislative puzzle of
expiring tax cuts and dramatic spending cuts established by Budget Control Act
of 2011. "I expect the political brinksmanship to come to a solution that will
bring a modicum of stability to financial markets," says Rossi.

However, concessions could reduce or eliminate historically important tax
deductions such as that for mortgage interest. Plus, expiration of the
Mortgage Debt Relief Act of 2007, which has facilitated short sales and thus
has helped move distress inventory off the market, "could have more than just
a chilling effect on a weak housing market."

"All of this suggests that housing in 2013 will not emerge from its struggles
in 2012, but the trends should be at least as good as last year unless we go
over the 'fiscal cliff.'"

Video: Cliff Rossi summarizes 2013 housing market forecast:

Contact Rossi: at

SOURCE Robert H. Smith School of Business

Contact: Greg Muraski, +1-301-892-0973,
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