Fearless forecast for 2011.
My three hot predictions for next year:
1. The sun will rise in the east and set in the west, despite Internet reports to the contrary.
2. A man will finally fly solo across the Atlantic. What's that? Lindbergh? 1927?
3. Home prices will fall 5 to 10 percent. Not. At least not in this area. At least not in the neighborhoods you're probably interested in.
Let's critique prediction 3 by looking at one of those penetrating market forecasts that helps regular guys like you and me predict the future with 100% accuracy and plan our lives accordingly. Not. Because like every other one-size-fits-all real estate forecast, this one assumes that a) your neighborhood is knee-deep in bank-owned homes, something true of only a relative handful of locations across the country, and b) your area isn't widely considered one of the most desirable places to live on Earth, which is true of most locations but not ours.
Real estate data company Altos Research, in a webcast quoted in the December 21 issue of Inman News, says home prices will likely drop 5 to 10 percent nationally in 2011. Why? "Two supply trends...: rising inventory and the lower quality of that inventory". Inventory will rise 25 percent, "back to 2008's peak of about 330,000, what [Altos] calls 'crash levels'".
In addition, "the quality of the homes coming on the market will also drive down prices". Bank-owned homes mortgaged in 2007 and 2008 "will continue to pour on the market in 2011...these REOs are likely to be in significant disrepair and demand lower prices".
Then Altos takes back its fearless forecast and hedges its bets. "Even if it's not a tsunami", says Altos, "but a trickle, these are homes that...have copper pipes ripped out, there's holes in the roof, there's windows missing. That's just the nature of the REO in a lot of cases."
Not. At least not in this area. And I'll bet I've seen more REOs than Altos Research. But at least one economist finally understands that REOs are usually the dregs of the market. Although I'm not sure why the REOs coming on the market in 2011 should be any more hammered than the REOs that came on prior to 2011. I guess standards are falling everywhere, even for REOs.
Okay, so before you plan your home buying based on this hot tip, pause a moment, take a deep breath, and look around. Do you see lots of bank-owned homes? Yes, you do, if you're looking in the ultra-affordable price range, although not as many as you would have seen when this mess first got serious back in late 2007. Because the banks have learned a thing or two since then: a) don't dump all your REOs on the market at once, and b) don't price them so they clog up the market for months. (The third advantage banks have over home buyersemploying people who apparently don't give a damn whether they sell their REOs or notis one they've had since the beginning.) And if you're looking in the ultra-affordable price range, you're also seeing short sales, lots and lots of short sales, those precursors to REOs. So between the existing REO "shadow inventory" banks are holding off the market, and the short sales that most likely won't sell and will eventually swell the REO inventory, it may be a while before the ultra-affordable end of the market comes back. What's "a while"? Beats me. Two years? Five years? More likely the latter than the former, but I don't know. It all depends on when Silicon Valley goes on its next hiring binge.
But if you're not looking in the ultra-affordable price range, you're not seeing many REOs or short sales. In fact, the further up the price range you go, the less you see of either. And it's not because the banks are holding back every midrange REO they have, or because local agents are disguising them to fool buyers (not that we could anyway, but I've seen this suggested on the 'net). No, it's because loose underwriting, the thing that started all this, was never a big part of the midrange and top-end markets here. Yes, the Great Recession is dragging down homeowners who never touched risky loans, but my sense is that, at least in this area, the tech-based middle class has come through in fairly good shape and feels cautiously optimistic about the future. Why do I sense this? Because they're the only ones buying houses in any numbers these days, both to live in and to invest in.
So what do I see the midrange doing next year? It won't surprise you to learn that I think the difference between a decent spring and a spectacular spring depends on what the news is between now and then. But it may surprise you to learn that I don't think we'll necessarily need lots of good news. I think just a few months of not-bad news will do, or even not-all-bad news. News that buyers can take as a sign the worst is over. Because I sense tremendous pent-up demand for homes here. From people who were priced out in 2005, and have been afraid to return to the market as long as it looked so scary. And from the wave that would have bought in 2008 or 2009 but deferred their purchase because Western capitalism was crumbling. Plus the wave just now hitting the right age and circumstances to be entering the market today. And I don't see enough distressed sellers in the midrange now to weaken prices significantly.
But what about the low-end? Will prices go down there? In the past month I've made offers on two bank-owned homes, in the dead of winter and in what appears to be a dead market, and both got multiple offers. If the banks keep manipulating the inventoryand at the low end, it's basically just REOs and short sellers, which means it's basically just REOsI think they can keep prices relatively stable until they work off their inventory. That's obviously their plan, at any rate, and so far it's working.
Have I missed anything? Oh yeah, more doom: a double-dip recession and rising interest rates. I'm not qualified to comment on whether 2011 will have another recession, except to say that what the man or woman in the street thinks the economy will do seems to depend more on temperament than on a thorough understanding of economic issues, perhaps because no one thoroughly understands economic issues, not even economists. I will say that of the seven local economic indicators my newsletter tracks, six were positive in the latest issue.
The one exception? Interest rates, and I'm beginning to believe that rock-bottom rates are a poor substitute for the real thingmotivated buyersjust like a respirator is a poor substitute for healthy lungs. By now it's clear to the less excitable among us that 1933 isn't around the corner, and rising yet extremely attractive rates might be a little of what real estate needs to get all but the most white-knuckle buyers off the fence. Real estate, like any industry almost entirely dependent on consumer confidence, deals with this Great Truth: that most of us think tomorrow will be like today, only more so. This things-will-only-get-even-better/worse concept of the future not only precludes the possibility of good times going bad (which helps move the product) but also precludes the possibility of bad times getting good (which means consumers need a kick in the rear to get them back in the market). Many of us seem to have forgotten that the economy moves in cycles and will improve, eliminating the need for (and chances of) historically low rates. Also forgotten is the fact that you can have a nice real estate boom with rates a lot higher than they are today. We've done it before, and we can do it again. The timing depends on when consumers start feeling better, and the Christmas shopping numbers say they're tired of feeling bad.
So will home prices fall 5 to 10 percent nationally? I don't know. Should it matter to you? Not unless you're planning on cross-shopping Palo Alto and Phoenix.
Will home prices fall 5 to 10 percent locally? I don't think so. But don't take my word for it. And certainly don't take the word of Altos Research, even if your target neighborhood is knee-deep in REOs. Just look around, and, better yet, make an offer or two. Your own eyes and experience will tell you whether prices are likely to drop 5 to 10 percent here next year.