OUT: Will Home Prices Bottom? IN: Will Inventories Bottom?
The big question this year was whether home prices had finally hit bottom. We now know the answer is a resounding "yes." Every major index shows asking and sales prices rising in 2012.
The key question in 2013, though, is whether prices will rise enough so that for-sale inventory -- which has fallen 43 percent nationally since the summer of 2010 -- will hit bottom and start expanding again. The sharp decline in inventory was a necessary correction to the oversupply of homes after the bubble, but now inventory is below normal levels and holding back sales, particularly in California and the rest of the West.
Rising prices should lead to more inventory for two reasons: 1) rising prices encourage new construction, and 2) rising prices encourage some homeowners to sell. The big question for 2013 is whether today's price gains will continue strongly enough to encourage builders to build and homeowners to sell.
Why it matters: More inventory will lead to more sales and give buyers more homes to choose from.
OUT: Robo-signing Settlement; IN: New Mortgage Rules
In February 2012, 49 states and five large banks agreed to the $25 billion robo-signing settlement, which funds loan modifications, compensations and other programs. It was intended, in part, to punish banks for their foreclosure practices, but wrongfully foreclosed-upon consumers received very little money and some states have diverted their settlement funds from housing toward other purposes.
In 2013, the big housing-policy drama will be trying to prevent a future housing crisis rather than dealing with the last one. The Consumer Financial Protection Bureau will announce new mortgage rules in January to define which mortgages are judged to be beyond a borrower's ability to repay and would therefore trigger legal and financial implications for lenders. These rules will need to strike a delicate balance between protecting consumers from the types of high-risk loans that contributed to the last crisis and giving lenders the incentive to expand mortgage credit.
Why it matters: New mortgage rules will determine whether mortgage credit remains tight or finally starts to become more available to people who want to buy a home.
OUT: Improving Housing Affordability; IN: Declining Housing Affordability
The huge price declines before 2012 and record-low mortgage rates in 2012 have made owning a home 45 percent cheaper than renting, according to the Summer 2012 Trulia Rent vs. Buy report. In fact, homeownership is more affordable than renting in even the priciest markets -- such as Honolulu and New York -- even without the tax breaks for homeowners.
However, now that home prices are rising faster than rents in most of the largest markets, the affordability tide is starting to turn. Furthermore, prices and rents are rising in many expensive markets, such as San Francisco, Miami and Seattle, reducing affordability for everyone. Rising mortgage rates, which consumers and forecasters expect next year as the economy strengthens, would also reduce affordability in 2013.
Why it matters: Worsening affordability will put homeownership out of reach for more households -- especially in the most expensive markets.
OUT: Expanding Refinancing to Stimulate the Economy; IN: Cutting the Mortgage Interest Deduction to Fix the Budget
You might be asking, how does expanding refinancing relate to cutting the mortgage interest deduction? Both are housing policies under debate that aim to serve broader economic goals. Refinancing helps stimulate the economy because it gives homeowners more spending money, one of President Obama's priorities in 2012. Cutting the mortgage interest deduction, which costs the federal government more than $100 billion annually in revenue, would help narrow the federal budget deficit -- and the top economic priority in 2013 is dealing with the federal budget without wrecking the economy (think "fiscal cliff").
Both Democrats and Republicans are considering a cut in the mortgage interest deduction, either through capping overall deductions, lowering the rate at which deductions are taken or converting the deduction into a credit.
Why it matters: Reducing the mortgage interest deduction would make homeownership more expensive, which would reduce home values, especially in high-cost housing markets.
OUT: National Housing Policy; IN: 'Localized' Housing Policy
There are plenty of national housing issues to deal with, such as the new mortgage rules (see above) and the future of housing giants Fannie Mae, Freddie Mac and the Federal Housing Administration. But many critical housing issues are local and therefore only fixable by city or state governments.
Foreclosures are no longer a national problem: the foreclosure inventory is concentrated in states with a slower, "judicial" foreclosure process -- such as Florida, Illinois, New Jersey, and New York -- where some are calling for state-level foreclosure reform. Affordability isn't a national problem either, but it's a severe local challenge in San Francisco, New York and other big, coastal cities, often aggravated by rules that limit new housing construction.
Even some national policies, like Fannie Mae and Freddie Mac's guarantee fees and conforming loan limits, are "localized": They vary geographically to reflect differences in state legal processes or housing prices. It's a sign of recovery and return to normalcy that the national housing crisis is becoming a range of diverse, localized housing challenges.
Why it matters: Housing policy will be more tailored to local issues, and less constrained by political gridlock in Washington -- so long as cities and states rise to the challenge.
Jed Kolko is the chief economist for online listing site Trulia. This article was originally published on the Trulia Trends blog.