With the close of 2010, many people are reflecting on the past year and looking forward to the next. For anyone interested in the real estate market, 2010 was a year of ups and downs. The first half was surprisingly strong as buyers rushed to take advantage of the expiring home buyer tax credit, but sales slowed in the second half as markets adjusted to conditions without the stimulus.

Now that 2011 is here, real estate observers are wondering whether this will be the year housing finally turns around for good. While no one knows for sure, mortgage giant Freddie Mac has some predictions on how the housing market will look in 2011. Below are the five features Freddie Mac says consumers can expect next year.

1. Low Mortgage Rates

Even though interest rates on mortgages have risen in recent weeks, they are still at favorable levels and should remain at or less than 5 percent in 2011, says Freddie Mac. According to the company’s December economic outlook, rates will start the year at 4.5 percent, rising to 4.7 and 4.9 percent in the second and third quarters. During the final three months of 2011, Freddie Mac expects rates should average 5 percent.

“With Fed observers expecting the central bank to keep the federal funds rate at its current target range of 0 percent to 0.25 percent for most [or all] of 2011, relatively low mortgage rates will be a feature of the 2011 mortgage market,” the report said.

A similar forecast from the National Association of REALTORS® also predicts rates will gradually rise, albeit at higher levels than stated in the Freddie Mac report. NAR forecasts 30-year fixed-rate mortgages will average 5.3 percent by the end of 2011.     

2. House Price Recovery

Although home values will stabilize at different times depending on the market, Freddie Mac says prices for the U.S. are close to bottoming out. Because prices are typically softer in the winter, many experts predict single-family home values will bottom in the first half of 2011, with a gradual recovery afterward, said the report.

A separate forecast from the National Association of REALTORS® says home prices will be about the same next year as they are now. Similarly, a Wall Street Journal survey said economists expect the Federal Housing Finance Agency’s U.S. Purchase-Only House Price Index to increase an average of about 1 percent over 2011.

3. Home Buyer Affordability

Freddie Mac also expects affordability to remain at favorable levels because home prices and mortgage rates, two of the three main ingredients affecting housing affordability, are at or near cyclic lows.

In the National Association of REALTORS®’ third quarter Affordability Index, the group reported affordability was at the highest level on records going back to 1971. During the July-to-September period, a family’s housing payment was only 14.2 percent of their income.

“With affordability high, many first-time buyers will be attracted to the housing market in the new year, likely translating into more home sales in 2011 than in 2010,” said Freddie Mac’s report.

4. Fewer Refinancings

While an increase in sales would raise the volume of mortgages originated for purchase, Freddie Mac says there will be lower total lending in 2011 because fewer people will refinance.

The company expects dwindling refinance activity because many borrowers have already refinanced, the government’s Home Affordable Refinance Program is scheduled to expire on June 30, and the expected rise in rates will reduce the incentive to refinance for those who have not already done so.

 5. Fewer Foreclosures

Based on trends from recent business cycles, Freddie Mac says the seriously delinquent rate in the overall market should gradually decline in 2011 based on improved employment, income growth and other factors.

A similar report from TransUnion projects there will be double-digit declines in mortgage delinquencies for every state through 2011. For the U.S. as a whole, the ratio of borrowers 60 or more days past due will drop nearly 20 percent by the end of 2011, the TransUnion report said. This decline is good news since serious mortgage delinquencies are generally considered a precursor to foreclosure.           

These are just a few of the trends we can expect for housing in 2011. To learn more about the conditions in your area, contact your local REALTOR®.

By Kenny Parcell
Appeared in the Salt Lake Tribune and Deseret News January 1, 2011