Matt’s 2010 Market Forecast

My annual forecast has always been the most popular post every year, so I hope you continue to find this year’s insightful and valuable.  2010 has been blazing by, and I’m just getting around to writing my annual real estate market projections and reviewing my previous year’s forecast.  I’ve been somewhat tardy in writing as I’m very busy in tending to my client’s buying, selling, and financing needs.  My full plate is one of many indicators that tell me 2010 will be an active year for the Sacramento real estate market.

With so many variables to the housing market, I focus my predictions on three broad categories: supply, demand, and interest rates.

‘09 Projection: Supply will remain low until April because many banks opted to not foreclose on properties during December and January…The number of homes for sale will roller-coaster up and down throughout the year, and end up close to it’s current level.
‘09 Result: The low supply of homes was the biggest real estate surprise in 2009.  Instead of the up and down roller-coaster trend I had predicted, the number of homes for sale continued to drop throughout the year (see graph). 


Currently, the Sacramento area has nearly ½ the number of homes for sale compared to a year ago.  Let me repeat…50% less homes for sale!  In my opinion, the reduced inventory of homes was the single, largest factor in stabilizing home values; more influential than tax incentives or low interest rates.  The surprising low number of homes for sale was likely due to “phantom inventory,” homes banks have foreclosed on but have not put back on the market for resale.  This decision by the banks has reduced the ratio of bank owned homes for sale on the market from 1 in 3 in December 2008 to nearly 1 in 6 currently.
’10 Projection: Inventory will be higher than 2009 levels.  Banks will begin to release more of their shadow inventory, and more short-sale listings will be successfully sold as improved processes are implemented.  Most major mortgage servicing companies are preparing to adopt streamlined, universal short-sale policies proposed by the Home Affordable Foreclosure Alternatives (HAFA) program.  If this program proves effective, more “upside-down” home owners will be inclined to sell and more home buyers will pursue short-sale properties. 

’09 Projection: While the global economic crisis has raised fears as to whether home prices will continue to fall, I believe low prices, low interest rates, and tax incentives will keep entry-level buyers extremely active in 2009.
‘09 Result: Gobs of 1st-timers purchased homes in 2009.  Since May of ‘09, Sacramento county homes priced under $200,000 have, on average, sold for more than asking price; a clear sign of strong buyer demand as buyers compete with each other.  For the first time in 4 years, the county’s median home price increased.

’10 Projection: Tax incentives will no longer be necessary to entice people to buy homes, and so the current tax credits will expire on April 30th, 2010 and not renews.  Sacramento saw a 4.8% INCREASE in the median home price over 2009 (see above), and this small yet steady rise will continue into 2010.  Demand will still be high in 2010 as buyers confidently (and rightfully) believe the bottom of the cycle is here.

Interest Rates
’09 Projection: With continued government intervention, mortgage rates will remain well below 6% for the year.  Lending guidelines will remain tight, but those able to qualify will have unbelievable refinance and home buying opportunities.
‘09 Result: In 2009 the Federal Reserve Bank bought 1.25 TRILLION DOLLARS in mortgage-backed-securities to keep mortgage rates low.  They did so because traditional investors refused to buy mortgages…they had lost faith in the system.  When the government swept in, interest rates immediately dropped more than a full percent, and fixed rates remained near 5% for most of 2009.
’10 Projection: Many predict mortgage rates to skyrocket above 6.0% in the coming months and stop any type of real estate market recovery.  The Fed has announced they will pull out of the mortgage-backed-securities market in March 2010.  The simple line of thinking is that rates were above 6% before the Fed got involved, so they’ll go back above 6% when they get out.  I don’t agree with this argument.  When the government intervened back in November 2008, the financial world seemed to be crumbling.  Investors were running scared from everything, including mortgages.  Fast-forward to February 2010 and things are immensely better.  They’re not great, but they are better.  Investors are now looking to buy assets again, but they want safety.  Mortgages have become a much safer investment as lending standards have tightened and home values in many areas have stopped falling.  If investors are ready again to buy mortgages (which I think they are), then that means they’ll be willing to do so at lower interest rates.  So, while I do expect mortgage rates to rise this year compared to 2009 levels, 30-yr fixed rates will stay below 6%.

Add it all up, and 2010 will be a year of recovery for Sacramento real estate.  Systemic challenges still abound, but overall this year will continue to be a wonderful time for home buyers, with now through April being the ideal time with low rates, low prices, and big tax incentives.  Tax credits to 1st-time and “move-up” buyers expire on April 30th.  If you’ve been considering buying a home for either personal or investment purposes, give me a call to discuss your options and see if you can take advantage of these ideal factors.

Thanks for reading.

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