For U. S. real estate, 2010 was the year of failed government intervention where nothing worked as intended. It was the year when bankers clearly threw their customers under the bus. And the only saving grace of this year from hell is that it might have been even worse.
So will 2011 finally be better for real estate? No. It will be 2012 before housing even remotely recovers.
Facing a mortgage crisis, governments this year did what governments do: They implemented new policies intended to help, then lied about those policies, saying they were really expected to work. Fat chance with $4 trillion in lost homeowner equity and a commercial lending system stunned into paralysis. While Treasury and the Fed had to respond somehow, the response they made was inadequate and possibly useless. It wasn't enough by a long shot, but then maybe no program could have been big enough to break this deleveraging fall.
The first-time homebuyer tax credit cost $16.2 billion for three months of slightly increased sales activity and a tiny (and temporary) slowing of price erosion. The Federal Reserve Bank spent more than $1 trillion buying mortgage-backed securities to keep mortgage rates artificially low, leading to some refinance activity but absolutely no impact on the purchase marketplace that was the Fed's target. The Fed spent more trillions buying government bonds to keep rates low across the board. This worked to some extent but did not fuel home purchase activity, which was, again, a major goal.
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Treasury's Making Home Affordable mortgage modification experiment, at a cost of $75 billion, was a proven failure, missing by 3.5 million its goal of 4 million modifications. The Home Affordable Modification Program (HAMP) and Home Affordable Refinance Program (HARP) -- the two tools intended to repair millions of bad mortgages--failed completely in the face of a loan servicer paperwork blizzard in the tradition of "the dog ate my homework. " With loan servicers earning more from foreclosures than from mortgage modifications, mods didn't happen -- and won't.
One of the most damning aspects of the Making Home Affordable failure is that it is now touted as having helped the deficit by virtue of having been such a miserable failure. Yes, the program cost less than expected, because it was a dud. Ditto for Fannie Mae's DU Refi Plus program.
Don't even get me started on robo-signing. There are bankers who should clearly be in prison, yet I don't see that happening. Too big to fail, remember? And principal reduction is now just a good punch line for Conan.
Here's the bottom line for these many mortgage programs: If you can't fix a $4 trillion problem for $700 billion, you sure can't solve it for $75 billion. These loan programs were just camouflage allowing deleveraging to continue on its miserable course with the TV cameras pointed elsewhere. Had a miracle happened and job growth resumed, the Obama administration might have pulled it off, appearing to fix what they were never in a position to fix--what they still aren't in a position to fix.
Sadly, 2011 will just continue the deleveraging, and market conditions may well get worse before they get better. Interest rates are trending higher and are well off historic lows, which should bring refinance activity to a halt. Credit is still tight and there are warning signs of increased equity destruction. Foreclosure activity will increase dramatically. Unemployment, of course, is still a drag.
First-quarter purchase activity is expected to be at record lows. Seasonal effects, climbing interest rates, tight credit, unemployment still above 9 percent, and the foreclosure time bomb are going to hurt everyone. Foreclosure activity will reach record levels in the first quarter then fall somewhat through the rest of the year, not because the situation is getting significantly better but because banks will deliberately control the pace of foreclosure to avoid a legislative backlash (and jail).
Still, 2011 will show the highest foreclosure rates in history, weighing on the market well into 2012. If there is any good news for 2011, it is in a moderate increase in purchase activity expected in the second and third quarters. Higher rates, tight credit, oversupply of bank-owned properties and continued unemployment will temper this activity, though. The extension of the Bush tax cuts may help purchase activity, too, finally allowing for some "green shoots. " But the grass will not really grow until 2012.
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