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Feature E ntering 2012, lenders were expecting slowly rising interest rates, consolidation among lenders, and a slow recovery of housing. Going one for three is good enough to be an all-star in baseball, but it doesn't look so good for financial forecasts. Rates went down, making yet another year in which they sunk to levels few prognosticators thought they would ever see. Consolidation, which some had expected to be strong due to the increasing costs of regulation, was modest at best. But that could be the result of many regulations, particularly in the Dodd-Frank Act, still waiting to be defined. Only about one-third of the DoddFrank rules had been enacted by the end of November, so the expected expenses—and the resulting consolidations—might just have been predictions a little ahead of their time. Housing did recover some, but much of the small rebound was due to investors buying the available properties, many using cash rather than credit. Some industry experts expected a faster recovery in 2012, some expected the pace to be a little slower than it was, but they generally agreed that some recovery was expected. So what do the results of the 2012 forecasts mean for 2013, when there is still plenty of uncertainty regarding the undefined portions of the Dodd-Frank Act, an economy showing only tepid recovery, and ambiguity regarding the "fiscal cliff," which failure to ascend could lead to another recession? "I don't think any forecast has held solid since 2006," said Mark Coupland, VP of business development for Appleton-Wisconsinbased LoanSifter, pointing to the start of the subprime crisis as the first of many shocks to hit mortgages and housing that have made any prognostications even more of a gamble than in previous years. Predicting the mortgage market is extremely difficult, agreed Theresa Blake, practice director for Wipro Gallagher Solutions in Franklin, Tennessee. "There are so many factors involved, you might nail one of them but miss out on a thousand others," she said. Interest Rates F or example, while no one expected interest rates to spike in 2012, many were forecasting that they would rise modestly or at least hold steady. The continuing decline of mortgage rates for a 30-year mortgage from around 4 percent to about 3.4 percent by the end of November was largely unforeseen. The rates are not expected to go lower—the floor has likely been reached, many agree, though they admit they had thought this before. Slightly higher rates are expected in 2013, though an increase above 4 percent for 30-year loans is highly unlikely, most experts agree, pointing to the Fed's announced stance of maintaining overnight rates near zero until at least mid-2015. "There likely won't be any significant increase in prices until the Fed announces a change in monetary policy," said Rick Sharga, EVP of Carrington Mortgage Holdings in San Jose, California. Lenders are no longer thinking in terms of interest-rate risk first, but instead are much more concerned with policy risk in light of Dodd Frank, Fannie Mae, and Freddie Mac capital requirements, Coupland said. There are several different ways any of these policies could go, but the most likely scenario calls for a slight increase in rates, costs, or both, according to Coupland. Any such movement will have lenders concentrating efforts on new mortgages because any increase in expenses to borrowers will dry up whatever is left of the refinance market. Home Sales H ome sales started to pick up in 2012 and are likely to continue to grow in 2013 as the recovery continues, according to industry experts. "This is the fifth straight year that homebuilding didn't meet replacement needs," Sharga said. Due to the lack of new homes, the demand—and the price—of remaining new homes, increased. However, there's been a significant shift in the buyers of those homes. "2012 was the year of the investor and of the short sale. There have been so many investors that traditional homebuyers can't get in," said Eric Lichtenfield, president of Tucson, Arizona-based Integra. "The investors have supplied a floor for the market." While investors may have provided that floor, they don't offer the same neighborhood stabilization benefits of owner-occupants, added Lichtenfield, who doesn't expect to see a significant increase in owner-occupant buyers until at least 2014. "Rental rates have exploded," Sharga agreed. While rising rental rates historically have pushed renters into buying homes, any such movement will occur more slowly this time because many potential homeowners don't have the necessary down payment or the credit rating to buy a home. Unemployment is still historically high, making it difficult to build up the money for a down payment, and some would-be move-up buyers are in homes that have little or no equity to provide the additional financing for an upgrade. Others will stay in rentals longer in order to have more flexibility to move. Blake added that any recovery in the housing market is likely to remain tepid until unemployment rates improve significantly. The next generation of buyers is expected to eventually pick up some of the slack in the owner (rather than investor) purchase market, but any such activity is likely a couple of years down the road, not in 2013. "The next generation is taking its time," Sharga said. "They are more interested in mobility rather than stability." Even so, Sharga and others expect a slight increase in purchases in 2013, growing from the projected 4.79 million for 2012 to near the 5 million level, but still far from the 7 million of just a few years ago. "It will be a slow road up," Blake agreed, saying that the market recovery could take five to 10 years. Consumer confidence might have more to do with any increase in home sales than interest rates, barring any unforeseen spikes, said Raphael Bostic, director of the USC Bedrosian Center and former assistant HUD secretary. So the highest consumer confidence level in four years—73.7, according to the Conference Board—is a strong indicator of improving home sales. However, Bostic also cautioned that any unexpected shock to consumer confidence (e.g., rising unemployment rates) The M Report | 31