2010….real estate recovery or more of the same?

This week we will be sharing with you what a few on the nations most influential leaders think will happen this year with housing.

First up, Mr. Robert J. Shiller…co-creator of the respected S&P/ Case Shiller Home Price Index.

Homeowners with the best credit are the next big risk for the U.S. housing market.

An increase in mortgage defaults among prime borrowers in 2009 is likely to accelerate this year, slowing the real estate recovery even as Americans become more optimistic about the economy, said Robert Shiller and Karl Case, the economists who created the S&P/Case-Shiller Home Price Index.

here will be continuing foreclosures, and not just subprime, it will be prime mortgages,” Shiller, a professor at Yale University, said in an interview. “This is creating a huge shadow inventory of homes that are still owned, but they’re going to be on the market in the next year or so.”

The number of prime mortgages overdue by at least 60 days more than doubled in the third quarter from a year earlier to 838,000, according to a Dec. 21 report from the Office of the Comptroller of the Currency and the Office of Thrift Supervision. Unemployed homeowners struggling to pay their bills will default on their home loans and increase foreclosures, Shiller and Wellesley College’s Case said.

Employers have cut more than 7.2 million jobs in the last two years, the biggest employment loss since the Great Depression. Measured annually, the U.S. jobless rate probably will average 10 percent in 2010, according to the median estimates of economists surveyed by Bloomberg. That would be the highest rate in government records dating to 1948, after rising to a 26-year high of 9.3 percent last year.

Prime Foreclosures

“Unemployment is not respecting income boundaries,” said Case in an interview. “It’s affecting rich people, poor people and middle-income people and they all have mortgages.” The U.S. may begin to see some signs of a housing recovery this year, he said.

The foreclosure inventory of prime adjustable-rate loans rose to 10 percent in the third quarter, more than doubling from a year earlier, while prime fixed-rate loans more than doubled to 1.95 percent, said Jay Brinkmann, chief economist of the Mortgage Bankers Association in Washington. The surge in prime ARM foreclosures is coming at a time when rates are resetting lower, reducing monthly payments, he said.

“If you have a prime adjustable-rate mortgage resetting in 2010, you probably are going to see your rate go down,” Brinkmann said. “Still, prime ARMs are defaulting at a higher rate because these borrowers were the risk-takers who chose the initially lower payments so they could stretch to get into a house.”

Recovery Signs

While an increase in prime foreclosures will slow the housing recovery that began in September, it won’t be enough to knock it entirely off track, Case said. Home resales in November rose to the highest level in almost three years, the third consecutive monthly gain, and the supply of new homes for sale is at the lowest level in almost four decades.

“That’s taking some of the pressure off,” Case said. “Hopefully in 2010 we’ll see some recovery.”

Foreclosures are declining for the type of subprime mortgages that sparked the global financial meltdown in 2008. New foreclosure starts among subprime ARMs fell to 4.92 percent in the third quarter from 6.47 percent a year earlier after the bulk of loans were either modified by lenders or the properties repossessed and sold, according to the MBA.

“What makes the rising default rates on prime loans so insidious is these are not folks who took out some crazy new type of mortgage,” said Brad Hunter, chief economist at MetroStudy real estate research in West Palm Beach, Florida. “These are people who probably took out what would ordinarily be a responsible mortgage.”

Obama’s Challenges

The increase in unemployment and the lackluster housing market have been at the center of the worst economic contraction since the 1930s and remain a challenge for President Barack Obama as he enters his second year in office. While property resales have started to rise nationally, foreclosures and price declines continue, even after the government spent $230 billion in fiscal 2009 to support homeownership, according to a tally by the Congressional Budget Office in Washington.

Loan servicers offered lower monthly payments for 680,000 delinquent borrowers, 274,000 under the federal Home Affordable Modification Program and 406,000 under other plans, according to a Dec. 21 report by the Office of the Comptroller of the Currency and the Office of Thrift Supervision. Borrowers defaulted again on 61 percent of loans modified more than 12 months earlier, the report said.

Confidence Needed

Confidence is the key ingredient to a sustainable economic recovery, Shiller and Nobel Laureate George A. Akerlof said in their 2009 book “Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism.” The book expands on a John Maynard Keynes macroeconomic theory by the same name that says emotion, rather than logic, drives consumer decisions that lead to economic change.

“I do see some signs of animal spirits, but it’s a mixture,” Shiller said last week of the housing market. In some areas of the U.S., such as California, home prices are going up at an “amazing” pace, he said. At the same time, “It would be entirely plausible that we would have a weak housing market for many years.”

Federal Tax Credit

In the same month, the group’s measure of home-purchase plans dropped to a 27-year low, despite federal efforts to stimulate housing demand with the tax credit and a $1.25 trillion Federal Reserve program to lower home-loan rates by purchasing mortgage bonds. The index measuring intentions of buying a home in the next six months fell to 1.9 percent from 2.1 percent in the prior month.

“At the moment a lot of potential buyers are deciding to wait and see,” said MBA’s Brinkmann. “If they do have a job, they may have seen 20 percent of their company laid off and they’re wondering if they’re next.”

Source: Bloomberg.