Every day, we hear news about millions of foreclosures in the pipeline. We also hear that the delinquency rate on home loans is improving. In the debate regarding the recovery of the economy, certainly real estate is front and center. We cannot have a strong recovery unless real estate contributes positively to economic growth. CNN/Money posted an interesting article during the holidays. On one side, Bill Ackman, chief executive officer and founder of hedge fund Pershing Square Capital Management, and Warren Buffett both stand on the side of the bulls who say it is time to start investing in real estate.
Meanwhile, Rick Sharga, senior vice president of RealtyTrac, an online marketplace for foreclosure properties, highlighted the millions of impending foreclosures to predict lower home prices in 2011. Who is right?
In reality, the news will probably be somewhere in between. There are some strong forces working in both directions as you will see by the reasons “for” and “against” a real estate rebound in 2011 we have listed below.
The reasons “for” the real estate market to get stronger in 2011:
►Homes are more affordable than they have been in a generation due to low rates and lower housing prices. Yes, rates have risen, but they are still unbelievably low.
►The economy is improving and jobs are being created consistently, unlike the previous three years. As the economy improves, household formulation will rise as well. Kids will move out of the basement and more couples will actually get divorced because they can afford to be divorced.
►While credit standards are tight, we have probably reached the height of the credit cycle, and as real estate recovers, banks will be more anxious to lend because real estate will once again be considered a “safe” investment. Along the same lines, as rates creep upward and refinances dwindle, banks will be competing for a smaller market share of home loans.
►The population is growing. We are now at more than 300 million Americans in the nation. These people need to live somewhere. Even those who are foreclosed upon will need to live somewhere—and not necessarily in an apartment because they prefer a house or need a house because of family size. Hint: These extra renters make for a great investment market for decades to come. Interested in my recent article: “The Demographics of Real Estate?” Then e-mail me at [email protected]
to receive a copy.
The reasons the real estate market “will not” gain strength in 2011:
►Two words: Shadow inventory. There are millions of homes in the foreclosure pipeline and millions of homes that are underwater, and therefore, are likely to become foreclosures in the future. Some have estimated as much as four years to clear out this inventory and thus up to decades for the real estate market to recover in some harder hit areas.
►Even with the economy creating jobs consistently, unemployment is high and therefore, consumers will react cautiously. The latest jobs report showed more than 100,000 in jobs created, but we need more than 200,000 new jobs each month to change the equation. The economy is improving, but we have not reached this level as of yet.
►The debt crisis in Europe and other economic factors we don’t even know about yet could cause the economic recovery to slow down or even come to a halt.
►The recovery has been pumped up by government stimulus in the past two years and this effect is ending. As a matter of fact, with the deficits faced by the federal and state governments, government shrinkage is likely to become a drag upon the economy.
What does this all mean for you? Even though refinances may be down due to higher rates, don’t expect the purchase market to fully fill the void. More competition for fewer loans will call for survival of the fittest. However, the good news is that these conflicting forces will allow for the purchase market to move forward and rates should not move up so quickly that refis completely vanish. If rates do rise more rapidly, it very well means that purchases are just getting stronger as the “bullish on real estate” side is winning out. Higher rates are not necessarily a bad thing in this regard…
From a recent Money article:
“Some industry experts say the rise in rates may stimulate a sluggish housing market. The rising rates create an urgency for potential buyers. They’ll have more incentive to buy soon before rates go any higher. Lawrence Yun, chief economist of the National Association of Realtors, doesn't foresee a moderate hike in rates as a negative for the industry. Instead, he says the real challenge is getting lenders to approve creditworthy buyers for a loan. ‘It's less about rates than it is about underwriting standards ... If lenders return to more normal, safe underwriting standards for creditworthy buyers, there would be a bigger boost to the housing market and spillover benefits for the broader economy,’ Yun said.”
Expect this debate to continue for some time. This real estate market is not likely to change on a dime. Job creation, looser underwriting standards and a stronger consumer will all come, but not at breakneck speed. Nor will higher rates...?
Dave Hershman is a leading author for the mortgage industry with eight books and several hundred articles to his credit. He is also head of OriginationPro Mortgage School and a top industry speaker. Dave’s NewsletterPro Marketing System can be found at www.webinars.originationpro.com. If you would like to stay ahead of what is happening in the markets, visit ratelink.originationpro.com for a free trial or e-mail [email protected]