This time of year often brings the common question, “Mike, how’s the market”. In anticipation of your curiosity, below are my thoughts and industry experts insight into what we HAVE seen in 2010, and what we WILL see in 2011. At first glance it may appear the Denver Metro real estate market is still in the doldrums, but if you look close, it really is improving.
NATIONAL ASSOCIATION OF REALTORS® Chief Economist Lawrence Yun is forecasting (nationally) 5.2 million existing-home sales in 2011, up from 4.8 million last year. He also expects modest improvement in prices—a rise of about 1 percent this year on a national basis. That would be the first in what Yun says will be a series of small but steady gains in the years ahead that will eventually bring home sales back to a period of normalcy.
At the root of these gains is continuing improvement in the overall economy. Yun is estimating modest 2.5 percent growth in the country’s gross domestic product in each of the next two years, job gains of about 1.5 million in the same time frame, and a slowly improving jobless rate, which he projects will dip from 9.6 percent in the latter part of 2010 to 8 percent in 2012.
This is what Yun calls the “virtuous cycle” that residential real estate started entering a few months after the home buyer tax credit ended in the middle of 2010. At that time, home sales took a big hit, dropping 27 percent in July. But in August, sales picked up again and have been gaining ever since without the aid of subsidy.
It is likely that price excesses from the housing bubble have been squeezed out of the market and with interest rates still at historically low level, it is a good time to buy a home. At the national level, the median home price at the end of 2010 was about $172,000, down roughly 30 percent from its $239,000 peak in early 2006 and, for the first time in a decade, less than its replacement cost. Foreclosed homes could account for a third of sales well into 2011, about the same as in 2010. “My best guess is that this year, people will be buying a lot of the foreclosed properties, but it will still take an additional one-and-a-half years to bring the inventory down to a more normal level” according to Yun.
Looking at 2011 from a consumer trend perspective, here are the top trends going into the new year:
#1: McMansions are out; compact housing is in
The era of the McMansion is over. Baby-boomers are downsizing to more manageable homes and first-time buyers are also entering the market with extremely different tastes than their parents. The younger generation of homebuyers, born between 1977 and 1994, are interested in smaller homes in vibrant, compact, walkable neighborhoods. While this new trend in housing will help revitalize urban cores, it also creates a problem: As baby boomers move into smaller homes, who will they sell their large, suburban homes to? We could soon see a glut of large homes languishing on the market.
#2: Homebuyers are thinking long-term
The attitude of current homebuyers has come a long way since the housing boom. In the past, many homeowners thought of their houses as “credit cards” to borrow money against — a mindset that caused many of the financial problems we see today. While most Americans still think buying a home is a smart financial move, they also realize that a house is more than an investment. Instead, today’s buyers are looking for a home — a place to provide shelter and security for a family. As a result, homeowners are planning on stay in their dwellings longer; first-time homebuyers want to own their homes for a decade, while repeat buyers want to own theirs for 15 years.
#3: Prices may have further to fall
Although home prices have stabilized considerably since the recession officially ended in mid-2009, Standard & Poor’s projects home prices may fall an additional 7 to 10 percent throughout 2011. This drop in prices is largely due to the high number of foreclosures expected to hit the market next year. If you plan to sell a home in 2011, pricing competitively will still be a crucial step to making a quick sale.
#4: More foreclosures to come
Foreclosure processing was delayed this fall by the “robo-signing scandal” — in which employees at various banks and mortgage firms allegedly violated proper procedures, raising concerns that many homeowners may have been unfairly evicted. On the bright side, if banks continue to foreclose homes gradually, home prices are likely to stay stable.
#5: Mortgage rates remain low
It’s not too late to take advantage of low mortgage rates. While rates are expected to rise slightly in 2011, they will likely remain low — even under 5 percent — throughout most of the year. According to the Mortgage Bankers Associates, fixed mortgage rates are expected to increase to 5.1 percent by the end of 2011. In November, the Federal Reserve announced that it would buy $600 billion of Treasuries to keep interest rates low and boost economic growth.
#6: Lending standards have tightened
Buying a home has become more difficult ever since lenders tightened their standards on loans insured by FHA Several lenders, including Wells Fargo & Co. and Bank of America, have raised the minimum credit score on FHA-insured loans to 640 from 620. This has reduced the number of buyers who can qualify, but is helping ensure that buyers can really afford the home they buy, thus decreasing the chance of future default.
#7: New Construction Still Slow But May Lead to Housing Shortage (really!)
Construction levels have dropped significantly over the last few years. If new home construction doesn’t pick up, some economists believe the U.S. may see a housing shortage in the future. With the glut of foreclosures on the market, the idea of a housing shortage may seem far-fetched, but these economists believe the number of homes being built isn’t enough to accommodate the growing population.
#8: Opportunities for investors
Like 2010, investors with cash will have a huge advantage in the 2011 real estate market. Thanks to a large foreclosure inventory, banks are often more concerned with making a quick sale than with getting the highest price possible. As a result, all-cash offers are often accepted over higher-priced offers where loans are involved. If you’re a typical homebuyer trying to stand out among all-cash investors, it’s important to make your offer as attractive as possible. That means saving up a sizeable amount of cash for a down payment and making an offer that’s close to — or even above — asking price.