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Real Estate Predictions for 2010 from the Front Line

As we enter the first true ‘new’ market any of us have seen in the past 20 years, we can be sure of one thing….2009 ended on December 31, 2009.
Ok, not funny.

But seriously folks, here is what we do know:
Fact 1
Where are the new houses?
No one is adding ‘for sale’ inventory. This is pretty much universal and cuts across all property types and all regions of the country. Historically, the USA absorbs about 1 to 1.5M new houses each and every year. Beginning in the middle 1990’s, the average approached 1.5M and gradually rose to its peak in 2005/6 of over 2M.
In 2009, we built less than 600,000. In 2008, we built less than 700,000.
What does this mean? It means that we are heading for a period of undersupply of housing. From the time that a new home is demanded and it is delivered, the lag time is about 9-15 months, depending on the season, region, size, etc. The lack of supply will be acutely felt soon (mid-year, maybe?) and will carry us into 2011.
The undersupply of housing is probably needed to allow pricing to recover a bit (more on this later).

Fact 2
Equity makes a comeback.
For those unfortunate souls that bought 2-4 years ago, they have seen their property values drop by 10-20% (or more…) depending on region, asset class, price, etc. The bottom line is that the folks who bought with leverage are upside down and the ones who put money down have seen that equity vanish.
That being said, as the loans age and/or are refinanced at some of these amazing low rates, the balances are being paid down 2-4% per year. If we get a moderate increase in value (as much as 7% is expected in some markets) then some folks could see as much as a 10% swing in equity. That would be HUGE for the market.
As we move into 2010 with no new supply, then the buying public will be forced to look at re-sales. The inability for the re-sale market to sell for less than the debt on their respective properties in 2008/9 forced many to stay in place and ride out the storm. This will begin to ease as debt levels and market values begin to move in opposite directions as opposed to the same direction.

Fact 3
The Food Chain Analogy
Sharks eat tuna (I think) while tuna eat something smaller and so on until you get down to plankton. It works exactly the same except oppositely in the real estate world. Think of real estate as more bottom up than top down. When the world went black in 2007/8/9, the real problem was creating the transactions at the bottom. If no one buys the first house, then no one can move up (or even sideways). With no one moving up to house two, no one gets to three….you get the picture.
Several important things are going on at or near the entry level that are changing things. The first time home buyer credit has been expanded to include more people, not just first-timers, and it allows people with higher incomes to benefit. Expanding the base of new buyers is important, albeit at the expense of the future buyer pool, but I digress…..suffice it to say that when someone looks back and says that they bought a home in 2009, they will view it as one of the best decisions ever made.
Secondly, FHA finally expanded many of their programs. The lack of leverage in the market was as responsible for the fall as any other factor. Once a degree of leverage was added back to the market, we found a floor. When your 401k gets cut in half and your boss says you may want to update your resume, you are not too keen on coughing up 20% to put down on a home, regardless of the perceived price. Putting down 5%, however, is a risk at least worth considering. Leverage is/was/will always be key. Dramatically altering down payment options changes pricing dramatically. We are now returning to early 2000’s lending practices.
Lastly, you need to look no further than pricing. Pricing has come down in conjunction with interest rates meaning the affordability factor is as strong as it has even been. The rent versus buy decision can be justified with a simple formula (which one costs me more on a monthly basis) and the lure of being able to afford more house now than ever before (or at least since 2002) is pretty powerful. With the threat of job insecurity diminishing, the collective buying public can see the opportunities.

So, in summary, I feel pretty good about heading into 2010. Of all of the inputs to the market, at the end of the day, supply and demand is really what we are talking about. Supply lags behind demand by at least 12 months and supply is still trending down sharply. Almost every other indicator is neutral to positive as it relates to demand.

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