Article From WSJ Blogs

December 29, 2010, 2:18 PM ET

By Nick Timiraos

Perhaps the biggest question facing the housing market in 2011: Is this the year housing actually hits bottom?

Home prices are expected to fall another 5% in 2011, though there are some who say price declines could be much worse. Here’s our list of four issues to keep an eye on in 2011 (or take a look-back at last year’s list):

1. Jobs: Call it a cop out because it’s so obvious, but without more tax credits to juice sales, the housing market needs job growth.

First, who’s going to buy a house when they’re not certain they’ll have a job in six months and when it looks like home prices are likely to fall another 5%?  Mortgage rates spent much of 2010 at a level that hadn’t been seen since the Eisenhower administration, but it didn’t do to increase buyer demand.

A crummy job market means that more homeowners risk falling behind on their payments, which would add to the supply of lower-priced foreclosed homes–further depressing prices. Foreclosures are already expected to pick up in 2011, though the rising supply could be offset somewhat by very low levels of new home construction.

If jobs pick up, demand picks up and many of the other problems facing the housing market can more easily take care of themselves. If it doesn’t, prices will fall further, and more homeowners will fall underwater, or owe more than their homes are worth.

2. Foreclosure delays: In September, some of the nation’s largest banks, including units of Bank of America Corp. and J.P. Morgan Chase & Co., suspended foreclosures due to potentially fraudulent document-handling procedures. Foreclosure filings were down sharply in November, a sign that the foreclosure machinery is proving to be slower to restart than the banks’ initial folks-there’s-nothing-to-see-here guidance.

Banks say that foreclosure-document problems are a technical problem and that they haven’t evicted anyone who wasn’t delinquent. But regulators and state prosecutors have launched a series of reviews and Investigations could shed more light on abuses, such as misapplied or excessive fees, by servicers, their attorneys and other third-party vendors. Meanwhile, some real-estate legal analysts have warned that problems may be more severe if loans weren’t properly recorded or transferred during the process of bundling mortgages and selling them as securities.

If foreclosures are more difficult and expensive to process, banks and investors could step up bulk sales of loans or foreclosure alternatives such as short sales, where banks approve sales for less than the amount owed.

3. Washington: Next month, the Obama administration is set to issue an initial set of recommendations for how to remake Fannie Mae, Freddie Mac, and the broader mortgage market. Deficit hawks also have their sights set on scaling back the mortgage-interest deduction, though immediate action isn’t expected.

Meanwhile, regulators are also writing new rules on provisions outlined in the Dodd-Frank Act that will clarify how banks must retain some of the risk on loans that are bundled and sold off as securities and define what constitutes a “qualified residential mortgage” that is exempt from such rules.

Other questions loom: Will regulators and policy makers get more aggressive about banks’ treatment of second mortgages, which have hindered efforts to modify mortgages or to avoid foreclosures through short sales? Will policy makers (pay particular attention to the states here) take more vigorous measures to slow foreclosures or rework mortgages?

4. Lending standards and rates: The government continues to dominate the mortgage-lending landscape, with more than nine in 10 new loans backed by Fannie Mae, Freddie Mac or government agencies such as the Federal Housing Administration. Policymakers might try to create more room for private lenders to return by allowing expanded conforming loan limits to fall in September. If mortgage rates continue to rise, that could lead buyers to scale back their purchases, putting pressure on home prices.

While some analysts have raised red flags over the FHA’s finances and say that loans with 3.5% down payments are leading the agency to take on too much risk, others worry about tighter lending standards that could further pinch demand. Fannie and Freddie are raising fees that could hit borrowers with down payments of less than 25%.

Readers, what other issues are keeping you up at night about the housing market in the year ahead?

Follow Nick for more housing and mortgage-related news on Twitter: @NickTimiraos