2011 Market Forecast Medley: Don your galoshes, sun hat and mittens…and hang on for the ride.

All in all, 2010 was a painful year in the world of real estate. Foreclosures dominated both commercial and residential market news; homeowners, already faced with negative equity, slashed prices and resorted to short sales, and lenders grappled with bankrupt debtors and an influx of REOs. Now at the dawn of 2011, economists and market analysts are doing their best to forecast the new year’s yet-to-be-realized trends. Predictions to date span a wide arc between partly cloudy (Lawrence Yun, NAR Chief Economist, is keeping his chin up about what to expect) to quasi-apocalyptic (see, e.g., this cheery forecast for our 2011 market). By sorting through the soup of opinions out there, I’ve pieced together a snapshot of dominant opinions regarding what’s to come. In the end, the best advice will be to pack your rucksack for any contingency, double-check your seatbelt, and keep the caffeine flowing, because no matter what happens, 2011 sure ain’t the year to fall asleep at the wheel.

The Ugly Stats on 2010:

- An estimated 4.2 million mortgage holders went into delinquency status;
- Between 2.8 and 3 million people had foreclosure action (including foreclosure notice) taken on their homes,
and approximately 1 million homes were foreclosed on outright;
- The number of first-time homebuyers dropped 50% from 2009;
- Negative equity fluctuated between 15% – 25%;
- Shadow inventory rose 10%;
- Housing inventories at all price points were listed for an average of 9 months; and
- Housing prices were down 4.1% by the end of the year.

What Pundits are Saying about 2011:

- Foreclosures: While foreclosures stalled for several months toward the end of 2010 as lenders attempted to slog through the implications of government bailouts and foreclosure scandals, the general consensus is that we haven’t seen the end of this road by a long shot. Estimates for additional foreclosures in 2011 range from 1 to 1.5 million. This continued influx of foreclosures will in turn cause home prices to remain depressed due to further increased inventory.

- Construction and Development:

• A number of developers are expected to snap up REOs and sell new single-family homes in 2011 and 2012 at significantly reduced prices.
• Green building is a trend to watch this year – smaller environmental footprints and the allure of reduced energy costs will bring new high-level LEED certifications across the board.
• Careful developers may find huge opportunities in 2011, particularly in apartment construction, as both institutional lenders and nontraditional financiers are, in some camps, expected to be more open to funding multifamily projects this year.

- Jobs: While higher-than-desired unemployment rates and a heavy inventory load are holding back activity in most real estate markets, the New York Times predicted at the end of 2010 that we could see new job growth this year due partly to the Federal Reserve’s arrangement to buy $600 billion worth of Treasury securities.

- Buyer Behavior:

As further home value declines are expected to occur during 2011 (predictions for decreases in 2011 home prices range from 3% to 10% nationally), potential buyers will be on the lookout for near-instant equity and will gravitate to homes that they believe are undervalued. Still, experts predict that buyers will remain circumspect and sale rates sluggish until concerns over salary freezes and layoffs are further assuaged. In addition, while mortgage lending rates dropped to new lows last year and are expected to stay down through much of 2011, credit is still often tough to come by, even for prospective buyers who would easily qualify in a” normal” economic landscape.

- Financing:

• Fannie and Freddie: 2011 is already being called the year of Fannie Mae and Freddie Mac. Rumblings in Congress have now begun regarding a number of proposals to rework both GSEs, and incoming reps are putting reform at the top of their to-do lists. How quickly anything will actually get done, however, is undoubtedly in question. It is the federal government, after all. When the changes do happen, however, insiders anticipate the inclusion of an explicit guarantee of government support to ensure mortgage liquidity.
• Federal Housing Administration: The FHA will continue as king of the secondary mortgage market in 2011. With Fannie and Freddie in morph mode, many experts anticipate that the FHA will dominate the mortgage market this year, especially in the realm of loans to first-time homebuyers.
• Interest rates: Interest rates are not expected to dip any lower, and may begin to rise beginning in the second or third quarter of this year.
• Refinances: Refis are expected to slow this year, with some experts predicting the refinancing market to fall from $1 trillion to approximately $350 billion. This, in turn, will drag down mortgage lending as a whole over the course of the next 12 months.
• Fixed Rate Mortgages and ARMs: Frank Nothaft, Freddie Mac’s chief economist, anticipates that 30-year FRMs are expected to remain below 5% throughout most of 2011, while ARM loans are likely to remain below 4 percent.
• Distressed Property: Earlier this month, Joseph Tracy, a senior advisor at the New York Federal Reserve Bank predicted that distressed sales will grow “even further over the coming year.” In addition, Tracy called existing negative equity an economic “overhang” that will certainly hamper the housing market for many years to come.

The Bottom Line: 2011 is unlikely to match 2010 for sheer market nastiness. The chances of a double-dip are seen as more remote than they were two months ago, and smart investors and developers will find goldmine opportunities if they keep their ears to the ground. Nonetheless, potential pitfalls abound, and the ride won’t be all smooth sailing. Stay smart, stay strong, and wear a helmet.  May the gods of Real Estate smile upon us all.

Jessica A. Edgerton, Esq.
After graduating cum laude from Indiana University Maurer School of Law in 2004, Jessica practiced as a litigation attorney in Boston and Chicago. She is now the Business Development Manager for US Appraisal Group’s Attorney Services Division, and lives in downtown Chicago.
Email: jedgerton@usappraisalgroup.com
Mobile: 312-342-0880