Each year we try to assess where the real estate market is headed for the coming year. Last year, we were way off the mark as there was no way for us to predict what would happen after the Treasury Department became more and more involved in the business due to their TARP involvement with the banking institutions. While the major players (Wells Fargo, Citibank, and most notably, Bank of America) have repaid their TARP funds, it does not mean that the governmet will continue to apply influence to real estate lending activities. In any case here we go:
Real Estate Supply
The market will probably have more supply of homes than last year, more than likely, a lot more. Banks have been trying with little success to stem the foreclosures through loan modifications in 2009. Despite all of the holdovers, approximately 31,000 modifications were done against over 4,000,000 loans in default. This low number of modifications is bad, but not as bad as it sounds. Many of the 4,000,000 homes in foreclosure were either 2nd homes, investments, already abandoned by the owners who may have alreay bought another, or brought the mortgage current prior to foreclosure without resorting to a loan modification.
Nonetheless, there will be a large number of homes available for sale in 2010 with the bulk of them to be foreclosed properties. This will put a lot of pressure on people who must short sell their homes this year. Buyers, when ready to buy, will look at foreclosures first, as they are much easier to close than short sales, which while easier than before, are still much harder to do. It will also put a large amount of pressure on investors who have been buying homes on the courthouse steps and reselling them at a profit. This practice has increased greatly over the past year but will be much harder to do with a large influx of foreclosed homes on market. We expect that by the end of the first quarter of 2010, the incresed supply will be noticable and that by the end of the year will may be at record levels.
The commercial real estate supply will also increase this year as many bad loans, many of which have already been negotiated have fallen into arrears. Until there are definite increases in business activity, this segment of the market will lag as well, perhaps worse than the residential market.
Real Estate Demand
In the residential market this year, demand has outstripped the supply by numbers we have never seen. Choice properties in popular neighborhoods have seen multiple offers for them (personally, we have had as many as 55 offers on 1 home and heard of properties that brought over 100 offers) throughout the year. This demand is pretty easy to see. Low prices, low interest rates, and a pent up demand due to low inventory is a recipe for prices to go up. This is what happened in 2009. Will it happen in 2010?
With the economy improving, but little improvement in the employment sector of it, demand would probably remain constant. There is promise of jobs in the ‘green’ economy, but many of them would be entry level jobs with low pay and benefits. If the health care plan passes in congress, taxes will go up by some amount. Prices on goods are projected to rise in 2010 due to higher taxes and the begining of inflation due to the excessive borrowing done by all levels of government.
Even in the face of these things, if people are able to keep their jobs or find equivalent employment, the demand should remain constant.
The HomeBuyers Tax Credit, modified and extended through April 2010, allows for a $6,500 credit to homebuyers who have purchased a home and are ‘buying up’ and $8,00 to first time homebuyers. Both of these programs apply to owner occupied homes only. A recent survey of homebuyers who have purchased recently showed that nearly 70% of them would have bought a home whether the credit was there or not. We suspect the the expiration of this credit will have little impact on the demand for homes.
There is a lot to be considered when attempting to deal with all of the items that need to be taken into account with real estate demand, prices, interest rates, supply, employment, taxes; all are factors when making estimates into where the demand is coming from or going to. California added nearly 1/2 million people to the population this year. some of them will be buying homes, some will need rentals, purchased by investors.
Given everything, we expect that demand will remian fairly constant in 2010 unless there is a substantial shock to the system.
Interest Rates
Interest rate are today at near historic lows. Just on this basis, you should expect interest rates to rise. however, some people think we have created the ‘perfect storm’ for interest rates to rise. The federal government has borrowed so much that they have ’squeezed out’ all available funds for other borrowing. The State of California is in as bad a situation today as it was when they balanced the budget 6 months ago. There is such a demand for governmental credit that interest rates will have to be raised in order for people to buy government instruments, or the government will have to raise cash another way, that is, to print it.
In either case, with higher interest rates or inflation, impacts to the real estate market will be real.
Real Estate Prices
Recently (in fact for the past 6 months or so) real estate prices have been on an increase each month; the number of transactions has also increased. While geographically these increases were large or smaller, the result is the same, prices have increased as well as the number of transactions, indicating that there is a mini-boom in the real estate sector. New home starts also appear on the increase as well.
2010, unfortunately, does not look to hold the promise of an extended recovery. One factor, demand, looks steady at best and these increases are the result of demand outstripping supply. However, 2010 will see the following: increased supply, higher interest rates, continued high unemployment, and higher taxes. The impact of all of these factors can only mean one thing, lower real estate prices during the next calendar year.
Buyers will be looking for affordable payments. If interest rates go up, be sure that prices will decline.
We prefer a balanced market with prices remaining fairly constant in a quiet interest rate environment. This condition does not happen often. Real estate for the homebuyer, and for the investor as well, has historically on average been a 5 to 7 year hold. When people hold on longer (use the 1940s and 50s as a reference) prices tend to shrink, as there is little interest in moving. When people move more often as they have in the past 25 years, due to job requirements, larger and larger families, the demand for amenities, and other cultural changes, prices go up. When adding in the bubble environment that we had begining at the start of this millenium, the shcks to the system can be severe, as so many people in this country and around the world have seen and experienced firsthand.
Of course, we could be wrong (check our results from last year). Understandably, we hope we are and the real estate markets are strong and healthy for both buyers and sellers in 2010.