2011 Real Estate Market Forecast

Happy Valentine’s Day!  Now, I know today is a day devoted to love, but I figure it can’t hurt to sprinkle in some real estate chat too.  The two topics just might have more in common than you think.

Like love, our housing market can be impossible to understand, but that doesn’t stop us from trying to figure it out.  I think the mystic of the market (& love) captivates us to know what others think about it.  That’s probably why my annual market forecasts are the most widely read posts on this blog (read last year’s here).

So here it goes…my attempt to figure it out…Matt’s 2011 Market Forecast.  No love talk here, though; just economics.  As usual, my forecast focuses on three categories in the Sacramento real estate market: housing supply, housing demand, and mortgage interest rates.  I will recap 2010 and give you my best guess for what lies ahead in 2011!

Supply
’10 Projection: Inventory will be higher in 2010 (than 2009) as banks release more homes for sale and more short-sale listings are successfully sold.

’10 Result: Nearly 60% more homes are currently for sale compared to the end of 2009 (see chart above).  These increases were largely due to more homeowners looking to short-sale their properties and more banks releasing homes for sale.  Unfortunately, this increase in supply was not met by an increase in demand (more on that in a minute), and the amount of homes sitting on the market (known as inventory) is currently at an uncomfortably high 3.6 months.
’11 Projection: Short-sales and bank-owned properties will remain the primary sale types in Sacramento.  Additionally, an emerging sale type, the government-owned home, will become more prevalent this year.  The Department of Housing and Urban Development (HUD) has been forced to foreclose on an increasing number of FHA-held loans originated in recent years.  While the Making Home Affordable Foreclosure Alternative (HAFA) program was mostly unsuccessful in 2010, I am optimistic that improvements will be made this year that enable more short-sale listings to successfully close.

Demand
’10 Projection: Demand will still be high as buyers confidently (and rightfully) believe the bottom of the cycle is here.
’10 Result:  The bottom certainly seems to be here with respect to Sacramento county’s median home price.  In fact, it has increased 1.6% over the last two years.  First-time home buyers and real estate investors continue to make up the majority of current home buyers.  The overall pace of sales last year declined remarkably after the federal 1^st-time home buyer tax credit expired in June 2010, indicating the market was propped up with artificial measures more than originally thought.
’11 Projection: Total home sales will be lower this year compared to 2010.  Although the bottom has arrived, it may be here to stay for some time.  Some potential home buyers may be reluctant to commit to a home purchase with looming job and other economic concerns and the absence of alluring tax credits.  Real estate investors, however, will be looking to purchase in abundance as rental rates are on the rise…11.6% nationally! (read this article for more details about these rising rental prices).

Interest Rates
’10 Projection: Despite wide-spread concern of drastically rising rates, I believe rates will stay well below 6%.
’10 Result: What a wild ride for mortgage rates in 2010!  While many worried of rates rising in April after The Fed stopped purchasing mortgages, rates actually plummeted for the first six months after the Feds exit from the market.  Towards end of the year, rates steadily climbed out of record-low territory.  In September I coined the 4^th quarter as “Crunch Time” (read September’s blog post here) and encouraged clients and readers to consider refinancing before rates rose.  Thankfully, many heard that message as I helped more folks refinance in the 4^th quarter of 2010 compared to any other 3-month period in my career.  30-year fixed rates rounded out the year hovering just below 5%, which was close to where they started the year.
’11 Projection: Mortgage rates will continue to be influened by politics more than economics, but in a very different way.  While I predict the Feds will stop trying to manipulate the mortgage and bond rate markets at some point this year, legislation from Congress will drastically impact mortgage rates.  MASSIVE financial reform regulations are scheduled to start in April 2011 that change how borrower’s closing costs are disclosed and paid for.  While unintended, these reform changes will increase the cost of obtaining a loan.  Furthermore, Congress is currently considering largely downsizing Fannie Mae and Freddie Mac’s participation in the mortgage market.  If this is done, mortgage rates will likely increase as banks must shoulder the risk of holding more mortgage loans rather than selling them to Fannie or Freddie.

In summary, 2011 will not be a rebound year from recent market challenges, but rather a continuation on our road to recovery.  American job creation & stability, mortgage financing availability & affordabiliity, and unpredictable legislative action will direct the market this year.  A healthy real estate market is within our sights, but we likely have another 18 months before we see a balance between home supply and buyer demand.  Until then, it will remain a buyers market largely comprised of 1^st-time home buyers and real estate investors.

Do you have different thoughts and forecasts for 2011 housing?  I’d love for you to share them here.  Please leave a comment with your opinions, and let the chatter begin.