Where is the real estate market headed in 2011?

Dennis Norman St LouisThe real estate market has not been very nice to us over the past 3 years or so and we are all anxious to see the light at the end of the tunnel. With that in mind, and 2011 in front of us, where is the real estate market headed in 2011? Before I take my humble stab at answering this question I need to remind you I am not an economist nor do I have a PhD behind my name, in fact I have nothing behind my name. All I can offer is a whole lot of experience “in the trenches“….as a broker, investor, developer….

Real Estate is Local…

Before I begin to discuss the prospects for this year I need to remind everyone that real estate is a very LOCAL commodity. Unlike other commodities such as gold, silver, crude oil and soybeans, in which prices are pretty consistent throughout the U.S. at any given point in time, there is, and never will be, a consistent “national” price for real estate. The exact same house may sell for $900,000 in San Francisco may be only $250,000 in Detroit…Therefore all we can really talk about are generalities.…what is going to happen overall, realizing there will be areas across the country that perform much better and some that perform much worse than the “norm”.

Foreclosures continue at near-record numbers…

We have seen a record number of foreclosures over the past couple of years and I’m afraid this year will not bring much change. There are many foreclosures “in the pipeline”. During the latter part of 2010 foreclosures came to a halt in many cases after allegations that there were “irregularities” in the foreclosure process by law firms and others handling foreclosures for several large lenders. This, along with the number of people that are “underwater”, meaning they owe more on their homes than they are worth, I believe is going to keep the foreclosures coming in 2011 at near-record, and at a minimum historically elevated, levels.

Recently some encouraging news has come out with regard to mortgage defaults, but I think that is just a temporary lull…I don’t see unemployment getting better, nor the economy in general, not to mention home prices are not rebounding, in fact they have continued to decrease. What I do see are people giving up...people can only hang on and survive in a bad situation so long before they decide to, as an old buddy of mine in the biz used to say, “cut bait” and move on. Therefore, as more and more people decide to “cut bait”, the foreclosures will increase. If home prices take another dip more people will find themselves underwater, compounding the problem.

Housing inventory better and worse…

The number of existing homes for sale has decreased for the three most recent reported months (September-November) to an inventory of 3.7 million homes for sale however this is still 5.4 percent more homes for sale than a year prior. Worse yet, because the rate of home sales has declined at the same time, this represents a 46.2 percent increase in the months supply of existing homes for sale.

New home inventory has decreased for the nine most recent report months (March-November) to an inventory of 197,000 homes which is a 16.5 percent decrease from a year ago. In terms of months supply, new homes are fairing better with a relatively modest 6.5 percent increase from a year ago. New home inventories are definitely the star of the show and, due to the greatly reduced pool of home-builders, not to mention the obscurity of financing for them, I don’t see this changing anytime soon.

I expect the inventory of homes for sale to increase in 2011 as a result of three things: First, from foreclosures and REO’s. Second, from sellers that, as a last-ditch effort before walking away from their homes, put their homes on the market to see if they can get them sold, and third, as a result of banks “pulling the trigger” on borrowers that they have been keeping on life support the last couple of years but now admit to themselves that the market is not going to come back in time to save them.

New home starts stagger and swagger…

While many in the media keep pointing to the decrease in new home starts and calling it a negative, I think they are wrong….at least from an inventory and demand standpoint. What’s the point in adding more inventory to the market when we can’t sell what we have already? Not to mention, most the new homes sales I’m aware of are at prices that are less than the cost of the home…this is not a sustainable business model. So, while I think it is bad in the short-term for the economy not to be building more homes, I think it is better for the housing market and home prices.

Having said that, I think we are going to see some local markets that do much better in this regard. Metros that are able to create new jobs will spark new home activity as will other areas that have a strong draw for people to want to live there whether it be no state income tax, low cost of living, quality of life, etc…

Home prices…the worst is over….

I think if we are lucky home prices will stay flat in 2011 although realistically the median prices in the U.S. will probably decrease somewhat as a result of the downward pressure caused by foreclosures (Radarlogic recently reported that distressed home sale prices were 38 percent below “other” home sale prices).

Advice to would-be home buyers or sellers…

Buyers– If you are fortunate enough to be employed, feel secure in your employment and have adequate resources to buy a home then I say BUY! In my opinion it doesn’t get much better than this! There is an abundance of homes to choose from, super low interest rates and it is definitely a buyers market! Sure, prices may fall slightly further before a recovery begins, but, assuming you are not buying a home planning on “flipping” it a week later, what’s it matter? You bought yourself a great home, at a great price, enjoy it! Prices may dip in the short term but prices will recover at some point in the future. In the meantime, you are enjoying your home, raising your family, etc.

Sellers- Homes are selling…unfortunately one-third of them are distressed sales…If your sale is going to be a “distress” sale, such as a short sale, then first, and foremost, find a professional real estate agent that knows what they are doing. This is not a time to try to suck up to your sister or brother-in-law, the neighbor next door, or anyone else that is “in” the real estate business just because they are a relative or a friend. Your life is on the line…your financial life that is and time is probably not your friend. Now is the time to find an experienced, seasoned professional….one with a thorough understanding of, and experience with short sales and other distressed sales so that they can guide you through this difficult, and at times, seemingly impossible, process.

If you are a seller that is not underwater then I would ask “why do you want to sell now?” In other words, why would you want to jump into shark-infested waters? If your reason for selling is to take advantage of the current market and move-up on the cheap, then booya to you! Go for it! This makes is a good move! Even though you may have take it hit on your current home, assuming you are moving up, you still come out ahead. For example, lets say your house should be work $240,000 in a “normal” market but to sell it you are going to need to sell it for 10 percent less than the normal value, you will take a $24,000 hit. But, if you are buying what would be a $500,000 house and that seller needs to take a 10% hit as well, which works out to $50,000, you are $26,000 ahead in the long-run.

Investors….Cash is king!

A few short years ago banks were literally throwing money at real estate investors, whether or not they were experienced or even credit-worthy for that matter and many “investors” were buying property using the “greater fool theory” meaning that it is foolish for me to pay this much but I’m confident someone more foolish than me will pay even more. Wow, what a recipe for disaster this was….however, as they say, hindsight is 20/20. (I guess I should add, I would be lying if I said I didn’t get caught up in this to some extent myself…)

Today is much different and banks are not only not throwing money at investors, when it comes to investors they are basically only making, using a term coined by a friend of mine, “courtesy loans“….loans to people that basically don’t need loans. This is probably the biggest hurdle for investors to get over and, while I see some improvement in this area in 2011, I think banks have learned their lesson and are going to continue acting like bankers and not speculators for some time.

For investors fortunate enough to have cash to invest, or financing in place, opportunity abounds! There are some great opportunities out there, particularly for the long-term investor looking to buy now in a down market, lease the property for a few years, then sell when times are better. This is a model that I like and I think holds some great reward for those that apply it properly. Again, a word of caution however, be cautious and conservative….don’t fall into the trap of thinking (or being sold on the idea that) just because you are able to buy something for 50 percent of what it sold for five years ago that you are getting a great deal. As many of us have learned, today’s value has NOTHING to do with what something sold for before….Look at today and what the property will do for you now. This is another area where working with a professional in the business that understand the investment side of things can be an immense help to you.

So there you have it….If by chance I’m right with my predictions then, overall 2011 is probably going to work out better than 2010…if I’m wrong lets hope that I’m being too conservative and 2011 is going to be much better rather me being wrong the other direction.

Find the real estate professional you want…

If you are looking for someone you can trust will have the knowledge and experience necessary to help you buy or sell in this market you can take advantage of our referral service by clicking here. Myself and my business partner have relationships with great agents and brokers throughout the U.S. and will be happy to give you our recommendation.

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