Housing Market 2011: A Spirited Dialogue

housing marketRob Hahn and Jeff Corbett are partners in 7DS Associates, a strategic management consultancy focused on the real estate business. As industry insiders and observers, they agree on many aspects of the current housing market; they disagree on plenty of others. AOL Real Estate asked them to conduct a dialogue throughout this last week of the year, discussing the big real estate topics of 2011. This is Part 1 of 5.


Been thinking about our recent conversations around what to expect out of the housing market in 2011. While we share a similar bearish outlook when it comes to factors like rising interest rates and further depreciation of property values, I should mention that I think it's a great time to buy, if you can afford to. Call me crazy, but let me explain.
If you have sufficient documentable income, job consistency, a pristine and deep credit history as well as a pile of cash in the bank, the tried and true investment strategy of "buy low, sell high" is a strong play today and going forward into 2011. Houses are on sale! This in sharp contrast to the recent past, where ridiculous liquidity in the credit markets fueled irrational and impractical "buy high, sell higher" mentality that got us into this mess.

I expect available housing inventories to increase, as foreclosures and the displaced borrowers they create continue to be flushed through the system. Meanwhile, the qualified borrower pool will shrinksdue to increasingly stringent underwriting guidelines and affordability decreases with inflation and the associated rise of interest rates.

It's a bearish buyer's market, but a buyer's market nonetheless.

Hey Jeff -

You've got some interesting thoughts there. They make sense, at least on the surface. But I think you're missing a couple of critical things.

First, I don't know that houses are on sale. There are thoughtful peoplewho think that house prices have another 10 to 20 percent to drop before they reach market-clearing levels. Even with low rates, if your house value drops by 15 percent, you're going to take a pretty big hit on your equity. You would need to ride through that drop, and hope that the value returns to 2010 levels by the time you're ready to sell. Or, just write off the loss of equity as some sort of rent-equivalent for living in the house you want. But I don't know that home prices are actually all that wonderful right now.

Second, there's no doubt that interest rates are low, at least nominally. But as you know, it isn't the rate being advertised so much as it is whether the borrower could qualify these days. Who cares if the mortgage is 4.5 percent
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if the bank won't loan you the money? And major money center banks have very little incentive to make mortgage loans when they can just play the spread between the Fed discount rate and Treasuries.

Third, let's not forget the political stuff blowing in the wind these days. Congress might eliminate or limit the mortgage interest deduction. The National Association of Realtors thinks that would drop home prices by 15 percent overnight. I would sit on the sidelines and wait to see what gets resolved on that issue.

Having said all that, the big question in my mind is what happens with inflation. The official inflation numbers are a joke -- valid only if you don't eat or drive. We do know commodity prices are shooting through the roof across the board. Some folks think the reason is that China wants all this stuff, and that requires metals and cotton and whatever. But then, there are those who think the reason is that the Fed is trying to devalue the dollar by printing money.

So I'm forced to conclude that now is a great time to wait. The only exception might be investors who want to snatch up properties on the cheap and plan on renting them out to the coming millions of people who can't afford to buy a home, but need to live somewhere. Now I have to call my Realtor about not buying that house and renting instead for a while....

Still trying to decide which is right for you? Here are some AOL Real Estateguides to help you no matter whether you choose to buy or rent:

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