Will Local Housing Market Recovery Gain Strength in 2011?

As we move full speed into the new year, it’s a good time to assess how the Bay Area housing market fared in 2010 and what we can expect in 2011.

2010 picked up where 2009 left off as many homebuyers rushed to take advantage of the expiring federal tax credit, as well as capitalize on historically low interest rates and outstanding home prices. Our Bay Area housing market, as well as others across the nation, enjoyed healthy gains in unit sales and the median sales price in the first half of the year.

However, with the expiration of the homebuyer tax credit and continued sluggishness in the economy, the market cooled off considerably in the second half of 2010. The rush to get in before the tax credit deadline in June likely “front-loaded” many sales that otherwise would have occurred in the summer and fall.

While the overall market moved in fits and starts in 2010, the luxury market – those homes priced at $1 million or $2 million and above depending on the city – quietly turned in a very strong year. It is often said that the so-called smart money – the well-healed investor – is often the first to jump back into the housing market after a steep downturn, leading the way for the rest of the marketplace.

While the Bay Area has not been immune from challenges facing the nation’s real estate market, we generally fared better than many other parts of California and the nation. This fact was underscored in recent weeks by reports from S&P/Case-Shiller and Zillow.

In its third quarter price index, S&P/Case-Shiller found the San Francisco metropolitan area’s price index rose 5.5 percent year over year, the most of 20 metro areas in the U.S. Nationally, the index was down 1.5 percent over the same period.

In the Zillow home price index, the San Francisco metropolitan area was one of just six regions out of 25 that saw an increase in the third quarter from the previous year, up 1.5 percent. By comparison, the U.S. was down 4.3 percent and Miami fared the worst in the nation, down 15.2 percent.

So where does this leave us as we approach 2011. It’s always risky to make specific forecasts because there are so many factors that could dramatically impact the industry – unemployment levels, the stock market, consumer confidence, and political decisions, to name just a few. But there’s reason to believe that we’re trending in the right direction.

The California Association of Realtors in its 2011 housing market forecast predicted that the golden state should see a modest 2 percent increase in sales to 502,000 homes in the coming year. And after two consecutive years of record-setting price declines, the median home price in California will climb 2 percent in 2011 on top of this year’s 11.5 percent rise, according to the CAR forecast.

“California’s housing market will see small increases in both home sales and the median price in 2011 as the housing market and general economy struggle to find their sea legs,” said CAR President Steve Goddard.

While there are certainly challenges ahead, the upcoming year presents a trifecta of opportunities for buyers: Continued near-record low interest rates, extremely affordable housing prices, and plentiful inventory in all price levels. We haven’t seen this combination in many years.

The caveat is that there’s no guarantee mortgage rates will remain where they are today. In fact, in recent weeks, we have seen rates tick higher as the 10-year and the 30-year Treasury bill rates edge upward. And even a one-percentage point increase on a $500,000 mortgage can add several hundred dollars to a monthly payment. But for now, the rates are still extremely low by historic standards.

Additionally, the nation’s economy continues to grow, albeit slower than many of us would like. But corporate earnings have come back quite strong this year, which could bode well for employment growth in the new year.

Finally, a compromise in Washington that extended the President Bush-era income, dividend and capital gains tax cuts for two more years promises to encourage real estate investors and bolster the housing market.

So while it’s not likely to be the best year we’ve ever had in real estate, I’m cautiously optimistic that at this time next year we’ll be look back at 2011 as a very nice turnaround point for the housing market.

Here’s to a great New Year!

 

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