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.