Job losses and declining prices, though moderating, are still contributing to mortgage defaults and delinquencies. By Jerome Idaszak, Contributing Editor October 16, 2009 The rising tide of foreclosures spells trouble for the FHA, the Federal Housing Administration. Despite the agency’s insistence that a taxpayer-funded bailout isn’t in the cards, Uncle Sam’s housing insurance fund likely will need a $50-billion infusion next year to cover losses incurred when some borrowers it has insured default on their mortgages.What’s more, the foreclosure flood will dampen the housing recovery. Sales of foreclosed homes likely will reach 1.9 million in 2010, up from about 1.7 million this year. That compares with a typical tally of about 500,000 foreclosures per year before 2007 when the housing bubble burst. Sponsored Content One reason for the coming increase: Mortgage companies have been holding off, as they have struggled to determine which borrowers qualify for federally backed mortgage modifications. But by year-end, the uncertainty should abate as lenders realize that relatively few borrowers will qualify for help. Making matters worse, unemployment is likely to climb over 10% next year, pushing additional homeowners over the edge. And there is another surge of adjustable rate loans that are due to reset at higher rates. Mark Zandi, chief economist with Moody’s Economy.com, thinks it’ll be 2011 before the number of foreclosures ebbs, receding to about 1.1 million, as the economy improves. Advertisement The steady rise in foreclosures has resulted in a matching decline of single-family housing starts. They marched steadily upward from 2001 to 2007, hitting a peak of 1.7 million that year. A bottom of about 500,000 starts will be reached this year, followed by a small increase in 2010. James Fielding, a housing analyst with Standard & Poor’s, says that homebuilders’ biggest competition is from “Foreclosure Inc.” With a slew of foreclosed existing homes on the market, builders have to sweeten the pot to attract buyers to new homes, in many cases eliminating their profits. The lawns of some existing homes that aren’t in foreclosure are likely to sprout for-sale signs as well. Convinced that the somewhat-improved economy will make it easier for them to find buyers, would-be home sellers will decide to list their properties. Still, the supply of houses will creep lower. The inventory of unsold new homes is down 54% from its peak, and existing home inventory is down about 20%. Sales are being aided by historically low mortgage interest rates of around 5%. Sales will get a further lift from the flattening price trend, as would-be buyers perceive that the bargain basement sale won’t last forever. We expect the national median price on existing homes to drop by about 4% in the first half of next year, then level out in the second half. Look for the median price on new homes to slip an additional 2% in the first half, then climb 2% by year-end. For both new and existing homes, the national median price will decline about 12% this year. For weekly updates on topics to improve your business decisionmaking, click here.