As the end of 2011 approaches, the housing market is another year removed from the subprime mortgage meltdown. But the legacy of the crash remains, as homeowners, lenders, regulators and brokers alike continue to deal with falling home prices, a glut of unprocessed foreclosures and an uncertain economy. There have been recent signs that the industry is rebounding, but many concerns remain.
Here's a look back at housing trends in 2011 and what it could mean for the outlook in 2012.
1. 2011 saw record low interest rates and high affordability, but sales will likely remain weak
Average mortgage interest rates hit a historic low of 3.91 percent last week, according to Freddie Mac, and home prices have fallen to prices equivalent to a decade ago. But that hasn't translated into strong demand for housing.
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Although affordability is at a record level right now -- meaning that it's the most affordable time to buy a home -- you're still seeing sales activity very weak across the country and in the New York area, said Jonathan Miller, president and CEO of New York-based appraisal firm Miller Samuel. And it's because of credit.
The banks that originate loans, having been burned by subprime borrowers, have tightened their underwriting standards, making mortgages more difficult to get. Also, most mortgage activity is made up of refinances -- homeowners attempting to get a lower mortgage rate -- rather than new buyers, who may struggle to come up with a 20 percent down payment.
Although sales activity has increased recently, with a 4 percent increase in November compared to the previous month, announced this week by the National Association of Realtors (NAR), there is still a long way to go. The NAR also downwardly revised sales data dating back to 2007 by 14 percent, demonstrating that the market was even weaker than previously reported.
2. Price drops seen through 2011 will continue
Home prices have been declining since 2008, with a federal tax credit in early 2010 only temporarily boosting prices. But while recent months have seen continued declines, the rate has slowed. The Case-Shiller Home Prices Indices reported a 3.9 percent decline in the third quarter, an improvement from the 5.8 percent decline in the second quarter.
According to Zillow, homeowners are projected to lose $681 billion in home values this year, 35 percent less than the $1.1 trillion lost in 2010, and with losses concentrated in the first half of the year.
The losses also come with a caveat: the surge in prices during the boom weren't grounded in reality, but rather speculation and easy credit. While the current market conditions are far from positive, pricing doesn't need to return to peak levels for housing to be considered on the upswing again.
Housing prices were artificially elevated, said Miller. What we would hope for is stability for a number of years going forward.
He expects another 5 to 10 percent drop over the next year, and a real rebound may not happen until 2013.
3. Rentals rebounded in 2011 and will drive development in 2012
As the sales market struggles, vacancy rates for rentals continue to tighten and rents are rising -- particularly for multifamily apartments. Many of the same factors that make people reluctant to buy drive them to rent, as they seek short-term arrangements in the face of uncertainty.
According to Reis, the national vacancy rate for apartments was 5.6 percent in the third quarter, down from 7.1 percent in the previous year, the lowest rate since 2006.
The result has been intense interest in multifamily development. Even office landlords, such as SL Green and Boston Properties, are branching into residential. Meanwhile, Sam Zell's Equity Residential and the estate of Lehman Brothers battle over control of Archstone, one of the country's largest owners of multifamily residential, and once again a investment prize.
A recent PricewaterhouseCoopers (PwC) report also reiterated interest in multifamily.
Surveyed investors continue to view the apartment sector as an attractive play in delivering steady cash flows driven by solid rental demand and rising rents, said Susan Smith, editor-in-chief of PwC's quarterly survey, in a statement. As a result, investors view this sector as a hotbed for further investment activity.
In contrast to the sales market, which is heavily depending on government guarantees, rental development is being financed by banks and life companies, who see more of an upside in the sector.
4. Market disparity between, and within, regions will continue
The old maxim in real estate stresses location, location, location, and there remains a great divide between U.S. regions. In a handful of prominent cities, particularly New York and Washington, D.C., the luxury market has regained ground, boosted by Wall Street and the federal government, respectively. A tech sector boom in San Francisco has been similarly beneficial to housing.
Wealthy foreign buyers also flock to premier cities, often doing all-cash deals that bypass the traditional challenges of getting a mortgage. Most dramatically, the daughter of a Russian billionaire paid a record $88 million for a 10-room penthouse at Manhattan's 15 Central Park West.
But other areas, such as the sand states of Nevada, Arizona, Florida and California, continue to suffer from the aftermath of the speculative housing boom, bearing the brunt of foreclosures activity. Detroit has actually seen price improvements, according to Case-Shiller, but most likely because prices have hit a bottom and have nowhere to go but up.
There's tremendous disparity across the country, said Miller.
Even within the same city, there is a gap between distressed properties -- those involved in foreclosures and short sales -- and normal stock. In Miami, for example, Miller sees distressed pricing continue to drop, but non-distressed is actually stable or increasing, even if the overall picture is negative.
5. Foreclosure rates rising again, expected to jump in 2012
The lingering legacy of the subprime collapse are the millions of properties in foreclosure, with a significant portion still unprocessed by lenders, because of a temporary moratorium following improper processing and paperwork.
Recent reports show that the delayed wave of foreclosures may have begun hitting.
The U.S. Treasury's Office of the Comptroller of the Currency reported a 21.1 percent increase in new foreclosures during the third quarter. Foreclosure activity was down in November, but auctions increased to a nine-month high, according to RealtyTrac.
We're going to see over the next three or four years an elevated or heavy volume of foreclosures mixed in with normal housing, said Miller. It creates downward pressure on prices.
Aside from hurting prices, foreclosures lead to vacant properties, which may negatively affect the values of surrounding homes. An offshoot of the Occupy Wall Street movement even targeted foreclosures earlier this month by protesting inside vacant properties and those in danger of foreclosure.
6. Signs of life seen in housing construction but no true recovery yet
With the exception of multifamily apartments, residential construction remains deflated. But there have been recent positive reports, with housing starts increasing to a 19-month high in November, along with a rise in homebuilder confidence.
The American Institute of Architects reported a November increase in the architectural billings index -- a lead indicator for construction -- as more architects saw design work.
Fitch Ratings projects a stable outlook on the industry in 2012, with a 6.7 percent gain expected for residential housing starts.
7. Lawsuits, lawsuits and more lawsuits to come
A slew of lawsuits have been filed in recent months, involving banks, governments and the nation's largest mortgage backers, Fannie Mae and Freddie Mac. Many refer to the boom-era subprime mortgages that were sold as securities to investors, and whether the banks mislead investors.
Two federal agencies, the Federal Housing Finance Agency (FHFA), overseer of Fannie Mae and Freddie Mac, and the Federal Housing Administration (FHA), a subsidiary of the Department of Housing and Urban Developent (HUD), have brought suits against major lenders.
Meanwhile, all 50 states remain in discussions with lenders over a settlement for improper foreclosure practices, including robosigning, and the Massachusetts attorney general brought a suit against major lenders for in-state operations.
The Securities and Exchange Commission has also brought cases against six former executives of Fannie and Freddie over allegedly misleading claims of the firms' exposure to subprime losses.
The results of these suits will shape the narrative of blame for the subprime collapse, although they will likely do little to improve the current housing market.
8. Government attempts to wind down Fannie and Freddie, but no concrete plan likely until presidential election
Fannie Mae and Freddie Mac guarantee and buy mortgages from loan originators, allowing those lenders to make additional loans. With the private sector virtually deserting residential loans, the two agencies are a vital part of the current housing market.
But the federal government, which took over the entities in 2008, appears divided over the future of the two entities.
Sen. Johnny Isakson of Georgia has proposed a plan to unwind Fannie Mae and Freddie Mac over the next decade and gradually repaying their debt to taxpayers, which has exceeded $150 billion.
The goal is to have the private sector eventually replace the two entities and return to the mortgage market, but that change appears unlikely in the short-term. It's also unlikely that the government will act on Fannie and Freddie until after the next presidential election.
9. Bailout possible for FHA if housing prices continue slide
The Federal Housing Administration (FHA) now guarantees a significant chunk of residential mortgages. It saw its market share shrink to around 2 percent during the boom as it avoided all subprime mortgages, but has stepped in to guarantee around 30 percent of the market.
In November, Congress voted to raise mortgage limits for FHA-backed loans, while keeping Fannie and Freddie rates lower, and the agency now finances luxury projects, as well as its traditional role in affordable housing.
While its growth has been an important stabilizer for housing, it has exposed the agency to potential losses if housing prices continue to decline.
10. Global economic uncertainty prompts potential homebuyers to wait
A series economic traumas occurred in the past year, from Standard & Poor's downgrading of U.S. sovereign debt to volatile stock markets to the Eurozone crisis.
The U.S. economy saw some positive signs in the fourth quarter, including 2.5 percent economic growth and some gains in employment, according to Fannie Mae. But momentum is expected to slow.
“Despite recent near-term improvement, the housing market will likely remain subdued next year -- a reflection of the winter season, an expected slowdown in economic activity, and a potential increase in distressed sales, said Doug Duncan, chief economist of Fannie Mae, in a statement.
The greatest impact on housing may be psychological, as potential homebuyers are wary to invest in an uncertain economy, especially in the face of falling prices.
What does a homebuyer do when they see this swirl around them? They wait, said Miller.