Thursday, January 6, 2011

Will 2011 finally see a real uptick in sales?

The 2nd half of 2010 was, to put it mildly, something of a challenge in the real estate industry. Once the tax credit expired, sales took a pretty hard dip for the remainder of the year. Although there seems to have been a bit more activity towards the end of the year, 2011 is projected to be more of a "transitional" year as opposed to any kind of full-fledged recovery. Here's a brief look back and my own outlook for the new year.

2010 in review

The beginning of the year got off to a hurried start as first-time buyers were rushing to find something that fit their budgets before the tax credit expiration. Most real estate analysts and professionals recognized that this was "pulling forward" sales, but we all went along for the ride anyway. Few, if any, seemed to think that sales would fall off at the rate that actually occurred. Double digit percentage decreases in sales volume were encountered from July through December.

Perhaps lessening the pain was the unprecedented, and unexpected, drop in mortgage rates. For the better part of the summer and fall, rates continued a steady drop until 30-year rates were in the 4 - 4.25% range, levels not seen since the 1950's. Although they popped back up a bit in December, they were still mostly under 5%.

As we entered the Fall market, the foreclosure situation went from bad to just plain ugly. The media was all over the use of "robo-signers" and the potential for fraudulent foreclosures. The actual number of homeowners that were impacted by said fraud were found to be very few and far between. Nevertheless, banks were forced to put a hold on foreclosure processing until they could clean up their act.

Finally, the year would not be complete without a look at inventory and pricing. Inventory remains sky high relative to sales levels, sitting at 12.5 months through November. The one bright spot for the Cincinnati market was that prices seemed to find a foothold, with the average price increasing marginally month over month. (See November's charts)

2011 and forward

While the rest of the economy seems to be finding its footing again, most economists seem to suggest that housing will remain a drag on the broader economy until sometime in 2012. My personal prediction is that the Cincinnati area will see a modest uptick in both sales and pricing in the 2nd half of the year. Some of the factors in play include:
  • Jobs, jobs, jobs. Without an increase in jobs, housing will be stuck in neutral. Fortunately, all the indicators show the number of area jobs increasing on a slow, but steady, basis.
  • Foreclosure pipeline. It is nearly a given that foreclosures will continue to occur at historically high rates through 2011, and continue to pressure prices and inventory. The positive is that they are expected to decline from 2010 levels and that they are mostly impacting low priced homes and areas of the country hit hardest (e.g., Florida, Arizona, Nevada, and California).
  • The "new normal". Gone are the days (mostly) that everyone was looking for bigger and bigger homes. A certain downsizing mentality has taken hold where once a buyer who might have wanted that 4000 sq. ft. McMansion a few years ago, instead is looking at a more modest 2800 sq. ft. that is 75% of the price. The average home size began to tick down in 2008 and the trend is expected to continue.
  • The Mortgage Interest Deduction. If Congress really begins to seriously tackle tax reform, expect the mortgage interest deduction to be a point of contention. When the Deficit Reduction Commission suggested lowering the threshold to $500,000 in December, it was "knives out" on many fronts. If the MID is lowered, expect higher end home sales to take a bit of a hit (and reinforcing the downsizing move noted above).
I don't doubt that 2011 will be another tough year for those who are on the sell side, but I also expect that buyers will find fewer and fewer bargains available which might be the push towards a more balanced market in 2012 and later.

Wednesday, January 5, 2011

Energy standards in play for 2011

New and revised energy standards for 2011 could make this an interesting year for both existing home owners and those looking to buy a new home. Here's a quick look at some of the changes on tap:
  • Revised Energy Star guidelines: Products and homes looking to label themselves as Energy Star certified will have to meet more robust criteria. New specifications for many products and appliances became effective January 1. New criteria for home construction will be phased in during the year and fully implemented by January 1, 2012.
  • Incandescent bulbs on the way out: Rules passed in 2007 (The Energy Independence and Security Act) are already having an impact in the marketplace to phase out incandescent bulbs. Most rules don't take effect until next year, but IKEA is already removing them from their shelves and other retailers could follow suit. Many argue that we are needlessly losing a cheap alternative, but whale oil lamps were cheap a century and a half ago too. Flourescent and LED bulbs continue to get less expensive, come in more shapes and colors, and will allow you to keep more money in your pocket over time.
  • Tax credits extended: As part of the tax compromise passed at the end of 2010, many home improvement credits were partially extended. Renewable energy credits (for items such as geothermal and solar power systems) remain in effect through 2016.
  • Ohio building codes for energy efficiency: Debate is taking place on the implementation of improved base standards required for new construction. Some builders are resistant to increases in areas such as higher R-values for external walls making the argument that it will add to costs during a recession. The new standards are already in place in states like Pennsylvania and Michigan.
As always, expect some of these to be controversial, but for the most part they should be good for consumers' bottom line. I anticipate we'll see some new technologies become more commonplace (such as the continued Duke rollout of Smart Meters) and greater competition in the electric and gas utilities sector.

Saturday, January 1, 2011

The Great Disconnect

Call it a result of the Great Recession, but a look back at the last year left me pondering the current buyer - seller disconnect in housing. What I am referring to is how there is a huge gulf in the mindset of home buyers vs. sellers when it comes to negotiating what constitutes a fair deal.

First, let's take a look at sellers in the current market. Many purchased their current home when the market was booming a few years ago. The average move is once every 7 years. Using that as a guideline, that would suggest the current home now on the market was purchased in 2003 - 2004 when home prices were really starting to take off.

No one likes to take a loss on what is supposedly a large asset, but even suggesting they will see a loss of 5 - 10% STILL causes a stunned disbelief (surely not My house!). My question is how does this compare to your 401K performance in the same period? 5 - 10% is the average price decline for many Cincinnati area neighborhoods. Some areas have experienced steeper declines, but these are mostly in "starter home" subdivisions where builders were offering 125% loans and where foreclosures are an outsized portion of the inventory.

The reason that it feels like they are taking such a large loss is due to the leverage factor. That is, most people carry a mortgage that, once paid, may leave them with nothing to show in equity - or worse, owing money to payoff a loan. Many overlook that it is this same leverage factor that during good times allows them to build equity faster.

Buyers, on the other hand, have seen too many news stories about the foreclosure debacle and have a mistaken impression of how everything on the market must be available at all time bargain prices. Are there bargains to be had? Absolutely! Is the house that you have just fallen in love with available at 75% of market price? Uhmm, probably not.

It often takes buyers entering this market some time to realize that we still see homes that are in top condition and priced well sell very quickly and close to asking price - even getting multiple offers. If you come across a house that you think is great, chances are every other buyer in your price range probably thinks so too. If you want a bargain - look at the house down the street that needs some work and has been on the market for the better part of a year.

These buyer / seller conditions has led to lengthier negotiations, more failed offers, and a feeling of dissatisfaction on both sides that they aren't getting the deal they should (sounds like Congress, eh?). Looking forward into the new year, I anticipate conditions to remain the same for a bit longer. That said, I do see more buyers entering the market, sellers being more realistic about price, and overall economic news being more positive. One can only hope that bodes well for 2011.