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What will the housing market be like in 2011?
by Jon Cook (President and CEO, Prudential California Realty Southern California and Center Coast)
Housing Needs a Small Business Recovery

Will it advance on positive economic news or will it retreat due to continued high unemployment? One thing is certain – housing in 2011 will be a unique market, the first to recover from a recession without a significant growth in jobs or incomes. Since the end of federal incentives in mid-2010, housing sales and prices have declined in most of the country, but late in the year, signs of improvement began to appear. To inspire confidence in home buyers, the market needs to stand on its own, and by all signs, it will.

According to economic forecasting firm IHS Global Insight, good news is plentiful. The American workforce is working more hours: 34.3 hours a week in November 2010 from 33.9 hours a year ago. Corporate spending on capital equipment rebounded 2.6% from a 3.6% decline the month before. Liquid money supply is up 2%, reversing a decline the previous year. Another sign that consumers feel a little wealthier is the rise of the stock market, which has recovered since hitting recent lows in March 2009.

Stubborn unemployment numbers are starting to abate, down from 9.8% in November to 9.4% in December. Federal Reserve Chairman Ben Bernanke said in mid-January 2011 that the 3% to 4% economic growth he anticipates for the year will help, but it won’t improve the jobs outlook significantly quite yet.

Mortgage Interest Rates
During 2010, the impact of mortgage rates falling to historic lows continued to drive refinance activity above typical levels. By January 2011, interest rates approached the 5% range on a 30-year conventional loan, up from all-time lows of 4.2% in October 2010.

These historically low rates provided critical traction to the housing market, and will continue to benefit home buyers in 2011. The combination of lower prices and low interest rates has created unprecedented affordability conditions, which is an important reason housing sales are starting to grow again, according to the National Association of Realtors. The trade organization’s December housing report noted transactions were up 5.6% over November, prices up 0.4% over the previous year, and supplies down to 9.5 months vs. 10.5 months in November.

To put affordability another way, in 2007, at the height of the housing market, it took 21.7% of median family income to buy a home. The median existing single-family home was $217,900, mortgage rates were 6.52%, and households needed $61,173 to buy the median home.

In October 2010, housing prices were 30% lower, interest rates only 4.62%, and the median family income was higher by almost $1,000, meaning it only took 13.6% of household income to buy a home in Q3 2010. With interest rates expected to stay in the 4% to mid 5% range – which will continue to drive affordability – more buyers may enter the market in 2011. Distressed inventories must be absorbed before real growth in sales and prices can occur.

Distressed Properties
There’s no question that the presence of distressed homes, which sell at a discount of 15% or more, has helped fuel affordability. With approximately 4 million residences in some stage of distress, this factor might become more important in 2011. Fortunately for the housing market, the percentage of distressed homes for sale (short sales, foreclosures) has remained stable since November 2009, around 33%. With so many of these homes still pending release to the market, meaningful discounts have yet to impact the market.

We must deal with distressed properties as part of our inventory in order to sell them, even at highly discounted prices. We encourage banks to work with home owners on settlement packages, because foreclosures in the pipeline must be resolved before we can hope to see meaningful appreciation in prices again.

2011: A Period of Stabilization
Current trends show that the return to a more active sales environment will be gradual, and that adjustments must be made before any real growth can be experienced. We believe that the existing home sales market will stabilize throughout 2011.

Over the last four years, housing sales volume and sales prices plummeted over 30%, while new home building retreated more than 65%, according to economist David Lereah. Five states account for more than half of all foreclosures: California, Florida, Michigan, Illinois and Arizona. Salaries froze in 2008 and have not risen since. Yet all of these conditions point to a recovery due to pent-up demand, which is being held in check by only one economic indicator: consumer confidence.

Southern California
According to MDA Dataquick, Southern California sales prices rose for the 12th consecutive month in November, but gains were minute. Transaction volume dipped to the second-lowest level for the same month in almost 18 years. Slower sales are typical for the season.

November median prices rose 1.4% from October, and 0.7% more than the year before. Historically, the median price hit bottom in April 2009, from the high in mid-2007.

But the price decline was due to a number of variables besides plummeting home values. Buyers shifted to lower-cost homes, including inland foreclosures, says the data service, which accounted for 35.1% of the market in November. That’s not much higher than the national median, and down radically from the peak in February 2009, when foreclosures were 56.7% of the market.

Luxury home sales are improving. The top one-third of zip codes accounted for 35.6% of home sales, up from the 26.2% low of January 2009. But sales volume remains stifled by tight credit policies. The monthly average for jumbo loans, those above the conforming limit of $417,000, accounted for 17.8% of sales in November, up from 15.1% the year before, but well below the 40% peak of 2007.

Investors and second-home buyers are returning to the market. They bought 23.1% of homes sold in November, up from a ten-year average of 16%. Cash buyers were 28% of the market in November, above the 22-year average of 14.3%. And flippers, those buying and re-listing their homes within a six-month window, were 3% more active than a year ago. The California Association of REALTORS says one-third of California cities are reporting an increase in the median home price over last year, suggesting that the bottom has passed, regardless of how slow the housing recovery.

Market Overview
San Diego enjoys a brisk seller’s market in homes priced under $1 million. Upscale homes aren’t expected to sell at the same pace as more affordable homes, which means that the 8.6 month supply of homes between $1 million and $2 million isn’t unusual. Once a price range approaches two years’ supply as it does with homes priced $6 million and above, then the market is said to be stagnant and unlikely to improve without significant price reductions from sellers.

Advice for buyers: The wild card for buyers is pent-up demand. Signs that job security is improving, that home prices have bottomed, or that mortgage interest rates will go higher could move buyers off the sidelines and into the market in a rush. Market conditions will continue to be favorable to buyers, but mortgage interest rates are unlikely to return to October lows. Be satisfied with the excellent affordability available now.

Advice for buyers: The wild card for buyers is pent-up demand. Signs that job security is improving, that home prices have bottomed, or that mortgage interest rates will go higher could move buyers off the sidelines and into the market in a rush. Market conditions will continue to be favorable to buyers, but mortgage interest rates are unlikely to return to October lows. Be satisfied with the excellent affordability available now.

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