The Great Real Estate Debate

Every day we hear news about myriad foreclosures in the pipeline. We also hear that the delinquency rate on mortgages is improving.

In the debate regarding the recovery of the economy, real estate is front and center. We can't have a strong recovery unless real estate contributes positively to economic growth.

CNN/Money posted an interesting article during the holidays. On one side, Bill Ackman, founder/CEO of the hedge fund Pershing Square Capital Management, and investment guru Warren Buffett both stand on the side of the bulls who say it’s time to start investing in real estate.

Meanwhile, Rick Sharga, senior vice president at RealtyTrac, an online marketplace for foreclosure properties, highlighted impending foreclosures to predict lower home prices in 2011.

Who’s right? The reality will probably be somewhere in-between.

Meanwhile, market watchers will look at employment reports for evidence of how the economy fared as we ended last year. Overall, the direction has been positive for the past two months with regard to lessening unemployment claims.

Following are reasons for and against a real estate rebound in 2011.

Rebound or regress?

Here’s why the real estate market will get stronger in 2011:

• Homes are more affordable than they’ve been in a generation due to low interest rates and lower housing prices.
• The economy is improving and jobs are being created, unlike the previous three years. As the economy improves, so will the housing market.
• While credit standards are tight, we’ve probably reached the height of the credit cycle. And as real estate recovers banks will be more anxious to lend.

Along the same lines, as interest rates creep up, refinancings are down. That means financial institutions will be competing for a smaller market share of home loans.

• The U.S. population is growing; it has surpassed 300 million people. These people need to live somewhere, even those who’ve been foreclosed upon—and not necessarily in apartments.

The real question is, absent government stimulus such as the home purchase tax credit, can the economy grow fast enough to absorb the shadow inventory of homes?

During the past two months, we’ve seen a string of economic reports indicating the economy is expanding, but it needs to grow faster.

For example, the U.S. economy added more than 100,000 jobs in December, the second time that’s happened during the past seven months. However, we need a growth rate of more than 200,000 jobs per month to reduce the unemployment rate.

Here’s why the real estate market will languish in 2011:

• Two words: Shadow Inventory. There are millions of homes in the foreclosure pipeline and millions more that are underwater and, therefore, likely to become foreclosures. Some estimate it may take up to four years to clear out this inventory.
• Unemployment remains high despite recent job growth. Therefore, consumers will react cautiously.
• The debt crisis in Europe could slow the economic recovery.
• Government stimulus has pumped up the recovery for the past two years, and this effect is ending. With the deficits facing federal and state governments, government shrinkage will likely become a drag on the economy.

Will the real estate market recover or regress in 2011? Stay tuned.

DAVID HERSHMAN is CEO of The Hershman Group, Kensington, M.D. Contact him at 800-581-5678.