Thursday, December 31, 2009

8 Real Estate Predictions for 2010 - Kissing the Bottom Goodbye - From Panic to Hope and Beyond

There is no doubt that 2009 was one of the most tumultuous years in real estate. Home values plummeted. Delinquencies skyrocketed. Commercial real estate values cratered. Interest rates collapsed. Loan modifications tanked. The bad news piled up with such frequency that none of it came as much of a surprise.

But tomorrow we head into 2010 -- a new year, a new decade -- and don't expect the rules of the real estate game to be the same this time around. As we leave 2009, here are some of our real estate predictions for 2010 for the Los Angeles market.

  1. Interest rates will rise. In March 2010, the government will curtail its purchase of mortgage-backed securities. This massive infusion of cash into the home finance system has artificially propped up the mortgage market, resulting in interest rates for 30-year fixed loans of around 5% -- at or near generational lows. Expect interest rates to climb to the high 5% range (at least) by the end of the year.
  2. The bottom of the market for first-time buyers will soon be past us. The hottest market segment in Los Angeles is homes priced under $500,000 in neighborhoods such as Silver Lake, Echo Park, Eagle Rock, Granada Hills, Chatsworth, and Woodland Hills. Bidding wars -- many on distressed properties -- are driving up prices and leaving eager buyers wringing their hands wondering how they are ever going to secure an "affordable" property. The reality is, it's going to be increasingly difficult. Prices are off their lows, inventory is down, and the window for finding deals has come and will soon be gone.
  3. Prices will continue to decline on the high end ($1.5 million +). The bidding wars on the low end have no relation to the languid market on the high end. Few buyers on the high end can qualify for loans under current stringent underwriting guidelines, meaning that fewer buyers are even part of this market (unlike during the the bubble years when many buyers were part of this market.) Smaller demand means lower prices. Some neighborhoods will hold up better (Beverly Hills, Venice, and Los Feliz come to mind), but overall expect downward pricing pressure in this segment of the market.
  4. Foreclosures and short sales will become pervasive in all segments of the market. The first wave of foreclosures was caused by defaults in the subprime market. The current and next wave of foreclosures and short sales will be caused by delinquencies among prime borrowers. The causes are job losses, resets of adjustable and option ARM (and other exotic) loans, and strategic defaults in which underwater property owners decide it's better to lose a home through a short sale rather than be saddled with an asset that offers no upside.
  5. Over-priced new construction will become less so as developers are forced to chop their prices. Many new condo developments in West Hollywood, Hollywood, West LA and other neighborhoods are priced in line with "boom" values, when the land was purchased, entitled and developed, rather than with new, deflated values. Developers will be faced with the decision of either holding their over-priced inventory or selling at discounted prices. Some distressed projects will be taken over by banks and their new sellers and will be able to undercut the competition with a lower price structure.
  6. Getting a loan will be tougher than ever. Three years ago, getting a loan was as simple as signing on the dotted line. Today, lenders scrutinize every aspect of an applicant's financial profile and underwriting hurdles are many. As lenders experience record default rates, expect lending guidelines to tighten.
  7. Investors will benefit as properties trade hands at generational lows. Commercial real estate has been battered as badly as residential real estate. The hotel and office categories have fared the worst, in some cases with drops of nearly two-thirds in value over a couple of years. The multifamily and industrial sectors have also been pummeled, but offer fundamentals that should attract investor interest in 2010. Look for buying opportunities as prices continue to decline, while the rental market tightens up.
  8. Real estate will begin reverting to its role as a safe, predictable asset class. For generations, real estate was a relatively boring asset class. The real estate market didn't offer the skyrocketing returns of stocks -- but it also didn't expose owners to the same risk. But then came the past decade, when real estate fortunes were made -- and as quickly lost -- through a bubble market of epic proportions. Expect real estate in 2010 to begin returning to its normal role as shelter and a relatively safe investment, without wild price swings and market movements.
We are excited about the changes that are afoot. And on that note, we wish a Happy New Year to our readers. Here's to a stable, predictable and maybe even boring (yay!) real estate market in 2010.