Lenders are still trying to manage the losses from loans made several years ago. Default rates continue to remain elevated on those older vintage loans, and thereby are introducing a large number of distressed properties into shadow inventory. Distressed sales have accounted for about one-third of all sales this year (or about 1.5 million) and will continue to be at that figure for next year. If the incoming distressed properties are not absorbed with more buyers, then home values will certainly fall further. That, in turn, will lead to more defaults, higher foreclosures and more financial losses for the banking system. The trade-off for the lenders is therefore to minimize losses on past originations or on new originations.
However, even assuming that underwriting standards remain the same and do not “loosen” up, home sales should still experience a moderate gain in 2011. Based on more visible metrics for jobs, income, and interest rates, existing-home sales are still likely to settle at a sustainable level of 5.2 million units. New home sales will depend more on how many homes builders can build -- and that depends on the availability of construction loans, which do not have any government backing, and therefore are even more difficult to obtain. Our best guess at the moment is for 400,000 new home sales in 2011, but that is still an increase from 316,000 in 2010. If the lending spigot opens up to a more normal flow – with normal risk-taking – then there will be a nice upside surprise to home sales next year from the baseline forecast figures.
excerpt from Dr Yun, http://www.realtor.org/
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