Learn the challenges and opportunities the coming year has in store for the housing market

By Shannon Petrie, FrontDoor.com | Published: 11/22/2010

#1: Housing recovery unlikely, but cautious optimism remains

While 2011 will be another challenging year for the housing market, many real estate experts are hopeful about the future and taking action toward recovery. A market comeback is contingent on a solution to the foreclosure issue, which is suppressing home prices and consumer confidence. For that reason, real estate professionals need to educate themselves about buying and selling distressed properties, handling short sales and working with investors, says Margaret Kelly, chief executive officer of RE/MAX and a panelist at the State of the Real Estate Industry forum held during the 2010 Realtors Conference and Expo.

According to Kelly, today’s market shouldn’t be called "the new normal" because the old market was abnormal. Despite the challenges of the current market, there are also plenty of opportunities, Kelly says, including low mortgage rates, stable prices and a plentiful inventory of homes for sale.

#2: McMansions are out; compact housing is in

The era of the McMansion is over, according to the 2011 edition of "Emerging Trends in Real Estate," co-published by PricewaterhouseCoopers and the Urban Land Institute. Not only are baby boomers downsizing to more manageable homes, but first-time buyers are also entering the market with extremely different tastes than their parents. The younger generation of homebuyers, born between 1977 and 1994, are interested in smaller homes in vibrant, compact, walkable neighborhoods. While this new trend in housing will help revitalize urban cores, it also creates a problem: As baby boomers move into smaller homes, who will they sell their large, suburban homes to? We could soon see a glut of large homes languishing on neighborhood real estate markets.

#3: Homebuyers are thinking long-term

The attitude of current homebuyers has come a long way since the housing boom. In the past, many homeowners thought of their houses as "credit cards" to borrow money against — a mindset that caused many of the financial problems we see today. While most Americans still think buying a home is a smart financial move, they also realize that a house is more than an investment. Instead, today’s buyers are looking for a home — a place to provide shelter and security for a family. As a result, homeowners are planning on stay in their dwellings longer; first-time homebuyers want to own their homes for a decade, while repeat buyers want to own theirs for 15 years.

#4: Prices have further to fall

Although home prices have stabilized considerably since the recession officially ended in mid-2009, we haven’t reached the bottom just yet. According to a report published by Standard & Poor’s, home prices will fall an additional 7 to 10 percent throughout 2011. This drop in prices is largely due to the high number of foreclosures expected to hit the market next year. If you plan to sell a home in 2011, pricing competitively will still be a crucial step to making a quick sale.

#5: More foreclosures to come

Foreclosure processing was delayed this fall by the "robo-signing scandal" — in which employees at various banks and mortgage firms allegedly violated proper procedures, raising concerns that many homeowners may have been unfairly evicted. The national mortgage settlement addresses the topic and is forcing banks to be fair. Though the controversy caused a dip in foreclosures in October, it won’t cause a huge drop-off in the number of distressed properties entering the market, says Rick Sharga, senior vice president of RealtyTrac. According to Sarah Bloom Raskin, a member of the Board of Governors of the Federal Reserve, there will be 2.25 million foreclosures in 2011 — the same as 2010 — and another 2 million in 2012. At the rate the banks are going, it will likely take several more years to work through the millions of delinquent mortgages. But on the bright side, if banks continue to foreclose homes gradually, home prices are likely to stay stable.

#6: Mortgage rates remain low

It’s not too late to take advantage of low mortgage rates. While rates are expected to rise slightly in 2011, they will likely remain low — even under 5 percent — throughout most of the year. According to the Mortgage Bankers Associates, fixed mortgage rates are expected to average about 4.4 percent in the fourth quarter of 2010 and increase to 5.1 percent by the end of 2011. In November, the Federal Reserve announced that it would buy $600 billion of Treasuries to keep interest rates low and boost economic growth.

#7: A new look at lending standards

Buying a home has become more difficult ever since lenders tightened their standards on loans insured by the Federal Housing Administration. Several lenders, including Wells Fargo & Co. and Bank of America, have raised the minimum credit score on FHA-insured loans to 640 from 620.

According to Lawrence Yun, chief economist of the National Association of Realtors (NAR), these overly tight lending standards are holding back the recovery of the housing market. In November, NAR’s Board of Directors approved a credit policy to urge the mortgage lending industry to alter their policies so more qualified home buyers can become homeowners. In addition, NAR plans to develop educational materials for Realtors and consumers about credit issues, including the importance of good credit, lender credit policies and how to find an affordable mortgage.

#8: Concerns continue over new construction

2011 will be another challenging year for the home building industry. Amid low consumer confidence, competition from foreclosures and high unemployment, home builders are struggling to boost sales. As a result, construction levels have dropped significantly over the last few years — in 2009, only 550,000 new housing units were built, compared to 2.1 million units at the peak of the housing bubble in 2005.

If new home construction doesn’t pick up, some economists believe the U.S. may see a housing shortage in the future. With the glut of foreclosures on the market, the idea of a housing shortage may seem far-fetched, but these economists believe the number of homes being built isn’t enough to accommodate the growing population. According to David Crowe, chief economist of the National Association of Home Builders, the nation will need to build 16 million new homes over the next decade — more than twice the current pace — to keep up with demand.

#9: Opportunities for investors

Like 2010, investors with cash will have a huge advantage in the 2011 real estate market. Thanks to a large foreclosure inventory, banks are often more concerned with making a quick sale than with getting the highest home price possible. As a result, all-cash offers are often accepted over higher priced home offers where loans are involved. If you’re a typical homebuyer trying to stand out among all-cash investors, it’s important to make your offer as attractive as possible. That means saving up a sizeable amount of cash for a down payment and making an offer that’s close to — or even above — asking price.

#10: Housing recovery contingent on jobs

Above all, a healthy workforce is key to housing recovery. While the unemployment
rate remains high, current homeowners will continue to lose their homes to foreclosure, and potential homebuyers will find it difficult to qualify for loans. According to the National Association for Business Economics, unemployment will stay above 9 percent in 2011, which could hold back a housing recovery in Minneapolis real estate in 2012.