Monday, January 10, 2011

Real Estate Predictions 2011: A View from Los Angeles - Panic, Capitulation Plus a Whiff of Despondency?

Best wishes for 2011.

We are certain this is going to me another incredibly exciting year in real estate in which the war-torn, battered and weary sellers are embattled with enterprising, arriviste, opportunistic buyers, creating price and terms clashes of epic proportions.

2011 will be the 2012 of property transfer, in which short sales, foreclosures, receiverships, bankruptcies and various and sundry other forms of financial and legal "work-out" are the norm rather than the exception.

2011 may even be the year of Capitulation (see the Sentiment Cycle above).  Long-term bearish sentiment has left not one optimist in the room -- time to "throw in the towel."

2011 may even possibly be the year of Despondency ("how could I have been so wrong?"), the inflection point setting the stage for the next cycle of price increases.

But maybe not.  2011 may have a whiff of Fear, Desperation, Panic ... and dare we say, Hope?

In whichever direction the market heads, Adner Realty Group will be ringside, ready to chronicle the Los Angeles real estate scene.

And how did our 2010 predictions hold up?  (See our December 31, 2009 post "8 Real Estate Predictions for 2010 - Kissing the Bottom Goodbye - From Panic to Hope and Beyond") We'd give ourselves about a 6.5 out of 8.  To recap:
  1. Interest rates will rise.  WRONG.  Our biggest mis-prediction.  Interest rates fell to an astonishing 4.375% for 30-year fixed loans, a low since records were first kept 40 years ago.
  2. The bottom of the market for first-time buyers will soon be past us. RIGHT! Prices in 2010 were higher than the ultra-low prices of 2009 when buyers fled the market en masse.
  3. Prices will continue to decline on the high end ($1.5 million +). RIGHT! Jumbo loan financing was scarce, and the abundance of short sales and foreclosures drove the market down.
  4. Foreclosures and short sales will become pervasive in all segments of the market. RIGHT!  Just because a house costs $2 million doesn't mean it's immune from foreclosure.
  5. Over-priced new construction will become less so as developers are forced to chop their prices. RIGHT!  The only way sellers could move the inventory was through red ink.
  6. Getting a loan will be tougher than ever. RIGHT! Underwriting standards tightened  considerably leading to delays in most closings.
  7. Investors will benefit as properties trade hands at generational lows.  HALF RIGHT.  Multifamily prices are off their lows; industrial prices are flat; but hotel and office sectors have not attained market bottoms.
  8. Real estate will begin reverting to its role as a safe, predictable asset class. RIGHT!  Heard any "get-rich" schemes in real estate recently?
We live in remarkable times, in which lows attain new lows, dire gets direr, conflicting indicators jam the airwaves and defy easy interpretation.  Although these times seem extreme, Southern California real estate has a century-long history of careening booms leading to colossal busts.  This remarkable time happens to be "the Big One".