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» tive in relation to short sales, loan modifications, and foreclosures because distressed mortgagers could owe a large tax bill from any canceled debt or loss incurred by the lender. There are many unanswered questions that we are dealing with today and that we will face tomorrow—and all could have an influence on the REO market. Still, the opinion of the Minnesota REO group is that we will see an uptick in foreclosure sales in the coming year. According to the current RealtyTrac report, in just the month of October, 2,100 new pre-foreclosure notices were mailed out to homeowners. This is a 34 percent monthover-month increase. Year-over-year, the number is slightly down, but it is showing the beginning of what we think will become a trend. Minnesota REO (www.MinnesotaREO. com) is a group of individual Realtors from different brokerages who specialize in REO and short sale transactions, jointly marketing their properties and services. With more than 100 years' combined experience in the distressed property space the group's seven members are working together to restore Minnesota neighborhoods—one home at a time. M A R K E T O U T L O O K TOM O'GRADY CEO Pro Teck Valuation Services As we look toward 2013, the U.S. housing market has entered what should be a sustainable period of improving conditions led by low mortgage rates, stable-to-rising home prices, declining unemployment, declining housing inventories, and a strong rental market. This has positive implications for the overall economy since the real estate market has historically been one of the most important leading indicators of economic activity. This is particularly true for the new home market. Even though new homes represent only a small percentage of the overall market, they have a disproportionate effect on the economy since data shows that on average, three jobs are created for a year for every new home built. One of the most important indicators for showing how "hot" the housing market is Months of Remaining Inventory (MRI)—the number of homes for sale divided by the number bought per month. The lower the MRI, the hotter the market. The most recent value of 4.5 months for new single-family homes is close to the lowest level in 50 years. Historical data going back as far as 1972 shows low MRI levels like today have always been associated with significant home price appreciation the following year. The primary reason for the new single-family market's low MRI values is the historically low number of new homes for sale. Needless to say, the "Great Recession" significantly reduced new home construction. In recent years, the supply of newly constructed homes has been running at the lowest levels since the 1960s. It is common knowledge that there are many distressed homes for sale in parts of the country. However, moving these through the pipeline is not a straightforward process in numerous cases. Many potential buyers become frustrated with the elongated acquisition times for short sale and foreclosure properties and turn to the new home market, if possible, where they know they can transact a home at a well-defined closing time and price. The problem is that the number of homes available in this channel is typically far below normal levels, which puts added pressure on newhome inventory. So it should not be a surprise that nationwide, new home prices have held up much better than existing home prices. While the two series have tracked one another quite closely since the 1960s, there has been a more notable divergence in the recent down-cycle. The most recent monthly median new single-family price was down less than 1 percent from the peak reached in 2006, compared to a 20 percent drop from peak for existing home prices. National median prices are currently distorted by the geographical distribution of new home sales. However it is a fact that the new and existing home markets have performed quite differently in recent years and will continue into 2013 due to underlying supply-demand issues. Tom O'Grady has served as Pro Teck Valuation Services' chief executive for 19 years. He is responsible for overall corporate strategy, service and product offerings, and executive management of the privately held company. M A R K E T O U T L O O K MARK FLEMING CHIEF ECONOMIST CoreLogic Looking back at 2012, I think it's safe to say we were all pleasantly surprised. Housing demand and supply found equilibrium, albeit at a very low level, and in many markets prices rose. Low mortgage rates and an effective Home Affordable Refinance Program (HARP) stimu- VISIT US ONLINE @ DSNEWS.COM lated a lot of activity. In fact the mortgage market was buoyed in 2012 by the strength of mortgage refinancing volumes. Looking ahead to 2013, we have to wonder if this will continue. Will refinance volumes continue to remain strong? Will house prices continue to rise? Will more regulatory certainty—mainly the clarification of qualified mortgage (QM) and qualified residential mortgage (QRM)—ease fears or restrict credit availability? Housing will continue to recover slowly as pent-up demand is released and rising prices "unlock" under-equited homeowners. Keep in mind that much of the gain has been at the lower end of the price spectrum and investor-driven in 2012, so it will be important to see the beginning of a transition to more traditional demand for a sustainable price recovery in housing. While purchase money mortgages are likely to increase with housing demand and a falling cash share of purchases, the dominance of refinance activity is expected to fade in 2013. But this is not as dire a statement as one might think. There are a lot of mortgages heading into 2013 that are "in the money." Additionally, since interest rates are likely to stay the course and there may be some expansion of HARP eligibility criteria, refinance activity is expected to fade only moderately in 2013. This is good news as the purchase money market should make up some of the void but is unlikely to grow enough to replace a big decline in refinance volume. A better housing market and persistent refinance activity all bode well for the mortgage industry, but that doesn't mean there are no concerns—the biggest being the expected regulatory burden the industry will face. One of the most important regulatory issues to watch early in 2013 is the definition of QM and QRM. In particular, the ramifications of the QM rule are substantial as it will define, in large part, to whom mortgage credit is provided. We can only speculate at the moment but the uncertainty cost to a mortgage lender could be significant enough to prevent them from providing credit to anyone except those that are well "within the credit box." 2012 turned out to be a good year for the industry. Looking ahead to 2013, continued improvement in the housing market is expected. A modest fade in refinance activity will likely occur, but not to the extent that it will shrink the overall market drastically. Regulatory certainty may improve with the release of the QM and QRM rules, but the impact on credit availability is yet to be determined. Buckle your seatbelts, we're in for an exciting ride! Mark Fleming, PhD, leads CoreLogic's mortgage analytics and economics team responsible for developing property risk and valuation models, house price indices, and forecasts and real estate trends reports. He holds a doctorate degree in resource economics. 63

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