Housing Forecast 2010

A Year for Rebuilding

Our housing forecast sees great opportunity in the 2010 residential real estate market. We see a continuation of what began for housing in the summer of 2009. We forecast housing prices to slowly rebound and gain momentum as the year progresses. Thus, we expect 2010 will be a very good year for Housing and Residential Rentals.

Visit the front pages of Wall Street Greek now to see our current coverage of housing and real estate, Wall Street, global financial markets, shipping, fine art, technical analysis, antiquities and global affairs.

(Tickers: NYSE: BAC, NYSE: FRE, NYSE: FNM, NYSE: GS, NYSE: MS, NYSE: WFC, NYSE: TD, NYSE: SRS, NYSE: URE, NYSE: IGR, NYSE: XIN, Nasdaq: RYHRX, Nasdaq: TRREX, NYSE: TOL, NYSE: HOV, NYSE: DHI, NYSE: BZH, NYSE: LEN, NYSE: KBH, NYSE: PHM, NYSE: NVR, NYSE: GFA, NYSE: MDC, NYSE: RYL, NYSE: MTH, NYSE: BHS, NYSE: SPF, NYSE: MHO, AMEX: OHB, NYSE: VNQ, Nasdaq: AVTR, NYSE: DIA, NYSE: SPY, Nasdaq: QQQQ, NYSE: DOG, NYSE: SDS, NYSE: QLD)

The direction and forecast for the vast majority of American Housing and Residential Rental Properties which qualify for FHA, FNMA, or FMAC financing is up. How quickly appreciation sets in, and to what degree in the year 2010, hinges on how quickly the general economy recovers and the Federal Reserve's response to that recovery. However, our forecast for the Luxury Home Market and the Commercial Market sees ongoing suffering, as these segments continue their price correction until values become extremely compelling or lending rates, terms, and underwriting criteria return to more typical levels.

Although there still remain many challenges, the recovery from the "Great Recession" appears to be underway. Fewer jobs are being lost and some sectors such as temporary employment, which is a typical precursor of job recovery, are actually showing growth. Real Estate in general has been suffering for three years from the effects of the unreal and unsustainable price levels caused by the euphoria and mania associated with the "bubble". Investments in general have been further exacerbated by the ending of a long and prosperous business cycle which culminated in the downfall of such American icons as Bear Stearns and Lehman Brothers. The loss of these institutions caused enormous fear, and a near free fall in the financial world. The ending of the business cycle has been severe, with unemployment reaching the highest level in decades, at over 10%.

"In my opinion, the worldwide stock market rise is signaling a recovery much stronger than most believe."

Many investors and business executives under 45 years of age have never experienced a severe downturn of this magnitude, as they were too young to remember the 1980-1982 or 1973-1974 recessions. Much as my father and grandfather were traumatized by the Great Depression, they have been shocked and traumatized by the vicious correction in the financial markets, never before having witnessed or experienced such turmoil. Many mistrust the recovery and are hesitant to put capital to work for fear of loss, and as a result there is an enormous amount of cash parked in money markets, bank accounts, CD's, and short-term Treasuries that will eventually be deployed. Young investors are unable to recognize an inflection point now, and as such remain safely on the sidelines with their cash. In my opinion, the worldwide stock market rise is signaling a recovery much stronger than most believe.

Our forecast notes that housing across America appears to be at the end of price decline. In most major markets for the last 6-8 months the price of housing has risen. However, there is a huge difference from housing recovering to housing recovered, with most properties purchased in the bubble years 2005-2007 currently "underwater," or not worth the mortgage owed. Typically, housing will flatten and perhaps decline slightly during a recession, only to rebound as the new business cycle gains strength. This correction has been severe, but our housing forecast says the rebound may be even more robust. If the recovery is sustainable for 36 months, housing will be much closer to "recovered."

Lessons of the Past - Bernanke is no Mellon

The Great Depression started off as a normal recession, but was badly managed. As the recession cleared out the excesses typically associated with the end of a cycle and as a new business cycle just started, the well intentioned but misguided Treasury Secretary Andrew Mellon severely restricted money supply to avoid a possible outbreak of inflation. The result was the death of the infant business cycle and a return to an even worse business climate with no confidence and no funds available for business expansion; devastating deflation ensued. The recession worsened, eventually destroying jobs, real assets, security investments, and businesses with unemployment reaching 25%. More than once, the fledgling business cycle tried to ignite, only to be extinguished by a further restricting of the monetary policy. The economy was manipulated in the wrong direction. The drastic loss of jobs, the restrictive monetary policy, and the deflation of assets crippled the economy for a decade. This recession has followed the path typical of past recessions, except Ben Bernanke is Chairman of the Federal Reserve and Chairman Bernanke is a student of the Great Depression.

The Federal Reserve has limited options in raising rates and removing excess money supply. Raise rates too soon, and the Federal Reserve takes a huge risk of forfeiting the recovery; raise rates too late and the Fed risks igniting inflation. The G-20 nations appear to be coordinated in flooding the globe with liquidity and assuming massive debt. Asset prices have dropped across the world, and wealth has been destroyed by the deflating of asset prices. Lenders are jeopardized by the decline in price; their loans encumber properties that are valued below mortgage amounts. To stimulate the economy, the governments of the world have shifted the burden of debt from individual and corporate entities to government auspices.

If asset prices appear to be the problem, asset prices then become the solution. Higher Real Estate prices have the desired effect of re-balancing the loan-to-value ratio needed by lenders to restore their reserves. A lender may have a $320,000 loan on a property that was worth $400,000 in 2006, but is now only $240,000. The bank has a potential loss well in excess of the difference between loan and value; the lender must make provisions for loan loss and increase their reserves, removing potential money from the economy. The owner of the property has lost his precious down payment; personal credit scores are adversely affected, and he has a bleak future of paying off a loan on a property severely deflated. If the asset prices were to recover, the lender and the homeowner would be saved.

This rise in asset prices has another name: Inflation. Rising asset prices and coordinated worldwide inflation will allow the governments of the world to repay the massive debt with dollars at 90%, 80%, or less of today's value; a substantial benefit. Governments will not repay the debt, but inflate the debt away.

During the Nixon years, Federal Reserve Chairman Arthur Burns followed a course of easy money: low rates and substantial increases in the money supply. Burns had followed McChesney, who advocated a tight monetary supply, removing money and raising rates just as the economy started to expand. Richard Nixon desired to ensure his re-election and persuaded the Federal Reserve to follow a policy of lower rates and an increase in the money supply. Arthur Burns became Chairman in February 1970, and by August 1971 wage and price controls were imposed to control inflation. By late 1974, inflation was over 12% and rising. Currently the monetary supply worldwide, and particularly in the US, is many times greater than that supplied by Arthur Burns. The rest is history; some yet to be written.

Quantitative easing has added $1.1 trillion alone into the system, with the total of all US injections by some estimates over $13 trillion, a historic amount. Short-term rates have never in history been this low. Monetary policy hugely affects the economy, but is not obvious for 6-9 months in a normal economy, and can easily take twice as long in a damaged economy. The effects of the historic November 2008 capital injections may not be felt until spring of 2010. Furthermore, politicians are well aware of the fact that unhappy, scared, and unemployed voters tend to remove incumbents from office; in November 2010, all seats in the House and 1/3 of the Senate are up for election. Thus, there is strong possibility for additional programs for jobs, loans, and stimulus prior to the election.

The forecast for 2010 is a repeat of the 70's; price stabilization through mid-2010, then appreciation. Unless short-term rates are raised early, and by that I mean anytime in 2010, housing should continue to recover. Prices of homes will rise, and wages will rise to keep pace with rising prices to balance affordability. Further, the US is the only developed nation with an expanding population of 1.5%; consequently, there exists a need for 1 million new residential units to keep up with family creation. Should a Comprehensive Immigration Policy be initiated, more homes will be needed. New construction will be needed to supply the pent-up demand.

I believe that by the end of 2010, the deflationary forces of de-leveraging will be nearly extinguished, and the economy will be visibly transitioning to inflationary expectations. Lenders will be clearing fewer non-performing and defaulted assets as the economy heals. Those that are liquidated will be processed more efficiently by the use of "Short Sales," and less by the traditional method of judicial foreclosure, as lenders streamline and standardize the process; saving 20-30% by the use of this procedure.

Commercial loans should still be unwinding, but lenders and commercial investors will also be disposing of non-performing assets through the use of short sales and a negotiated deficiency. Apartment owners and owners of residential rentals will enjoy rental increases as absorption of excess finally occurs and demand starts to create shortages; the result of limited new construction. Depressed rental rates should rebound with increases possible of 10-15%. Builders that have changed their product mix to adapt to current trends and price points in line with favorable financing afforded by FHA and FNMA, and additionally are also building on newly acquired land with corrected pricing, will become profitable; some extremely so.

In my opinion, the economy will not experience a double-dip recession, as the Federal Reserve will be slow to raise rates and remove money supply to ensure a recovery. The result will be a stronger recovery than anticipated (but forecasted by the dramatic rise of the global stock markets), and jobs will finally be added to the economy in late 2010 as cautious employers slowly expand their labor force. Unemployment will, however, still likely exceed 8% by year end.

The year 2010 should continue the recovery started in the summer of 2009. I expect housing prices to slowly rebound and gain momentum as the year progresses. Unless the recovery is aborted by premature restrictive monetary policy, the year will be a very good year for Housing and Residential Rentals.

Editor's Note: Article should interest investors in Bank of America (NYSE: BAC), Freddie Mac (NYSE: FRE), Fannie Mae (NYSE: FNM), Goldman Sachs (NYSE: GS), Morgan Stanley (NYSE: MS), Wells Fargo (NYSE: WFC), Toronto Dominion (NYSE: TD), UltraShort Real Estate ProShares (NYSE: SRS), Ultra Real Estate ProShares (NYSE: URE), ING Clarion Global Real Estate Income Fund (NYSE: IGR), Xinyuan Real Estate Co. (NYSE: XIN), Rydex Real Estate Fund H (Nasdaq: RYHRX), T. Rowe Price Real Estate Fund (Nasdaq: TRREX), Toll Brothers (NYSE: TOL), Hovnanian (NYSE: HOV), D.R. Horton (NYSE: DHI), Beazer Homes (NYSE: BZH), Lennar (NYSE: LEN), K.B. Homes (NYSE: KBH), Pulte Homes (NYSE: PHM), NVR Inc. (NYSE: NVR), Gafisa SA (NYSE: GFA), MDC Holdings (NYSE: MDC), Ryland Group (NYSE: RYL), Meritage Homes (NYSE: MTH), Brookfield Homes (NYSE: BHS), Standard Pacific (NYSE: SPF), M/I Homes (NYSE: MHO), Orleans Homebuilders (AMEX: OHB), Vanguard REIT Index ETF (NYSE: VNQ) and Avatar Holdings (Nasdaq: AVTR).


Please see our disclosures at the Wall Street Greek website and author bio pages found there. This article and website in no way offers or represents financial or investment advice. Information is provided for entertainment purposes only.