Why Your Home May Decline in Value - TheStreet

With foreclosures picking up steam, interest rates likely on the upswing and an imminent deadline for tax-favored home purchase credits, the possibility of U.S. homes once again declining in value is higher than most Americans may think. Here’s the case for a decline in home values in 2010.

First, the major news outlets are pumping an economic recovery for 2010, led by a resurgent housing market. But a growing number of economic analysts just aren’t buying it.

Here’s a quick rundown:

  • According to the analyst firm Fiserv, U.S. housing prices will decline by 11.3% by July of this year.
  • The financial Web site Economy.com (owned by Moody’s) predicts that housing prices will fall by as much as 10% for 2010.
  • Mortgage servicer LendingTree.com calls for a 5%-7% fall in average U.S. home prices for the year.

Why the glum outlook? And weren’t we supposed to be out the housing mess by now?

Holding the housing market back are two major economic themes — jobs and foreclosures.

Right now, the U.S. unemployment number is at 10%, as the economy shed 7 million jobs during the Great Recession. Some economists wonder if those jobs will even come back, which lends credence to the naysayers who call for a continued drop in U.S. home prices in 2010.

Foreclosures continue to threaten a housing market recovery. According to statistics compiled by ForeclosureListings.com, total U.S. foreclosures stand at 584,199 and homes in “pre-foreclosure” number 655,499. It’s the latter number that worries economists. With hundreds of thousands of foreclosures roaring down the track, it makes it that much more difficult for home prices to creep upward.

Another potential threat to housing values are mortgage rates, which have begun inching upward at the start of 2010. Some mortgage industry analysts are predicting that mortgage rates will end 2010 near or at 6%. Part of the problem is that the Federal Reserve has artificially kept mortgage rates down by buying $1.25 trillion worth of mortgage-backed securities. But that program ends in March, so mortgage servicers soon will be on their own.

Other support systems that propped up the U.S. mortgage market include the Federal Housing Agency (FHA), which offered cheap mortgages to customers, only asking for a 3% down payment (isn’t that one big reason why we got into this mess?). And Fannie Mae (Stock Quote: FNM) and Freddie Mac (Stock Quote: FRE) have been given billions of dollars by the federal government to keep making mortgage loans. Lastly, the government has extended the $8,000 new home purchase tax credit through April.

When these support systems go away, look for any housing recovery to stall, and make Nostradamuses out of the economists who predict a housing downturn in 2010.

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