The 2010 Real Estate Outlook

By Lisa Smith | January 07, 2010 AAA

The new year is upon us, and the mood in the financial markets is one of cautious optimism. Unfortunately for homeowners, the outlook in the real estate market remains bleak. Would-be homeowners face a slightly better scenario - particularly of they have cash to spend and don't need a mortgage. (From REITs to owning your own home, find out how to diversify your portfolio with real estate assets, in Add Some Real Estate To Your Portfolio.)

If You Already Own
Home prices are expected to keep falling as foreclosures continue, and high unemployment will keep demand low. This is bad news on several fronts.

First and foremost, a home is generally the most expensive item you will purchase in your lifetime. To see it lose value hurts.

Second, a significant number of homeowners are already underwater, meaning that they owe more on their homes than the homes are worth. Financially, that's a terrible situation to face. Psychologically, nobody wants to knowingly overpay for anything, particularly when the bill can last for 30 years.

Third, many people fell into the trap of using their homes a ATMs, refinancing every few years to take cash out. This bad idea was touted by financial gurus as a great way to get money to invest, since homeowners were only paying 6% interest and could theoretically earn much greater returns in the equity market. When the equity market tumbled 40% and interest rates fell way below 6%, the folly of this advice was revealed. In the year ahead, the only choice homeowners are likely to face is whether or not they wish to continue making payments on a house that is no longer worth what they'd paid for it.
Those who own their homes free and clear are in much better positions. The real estate market will eventually recover. In the meantime, these folks get to live rent free. The story is a little less happy if for those who need to sell, as prices are expected to remain depressed.

If You Want to Own
Would-be homeowners are in a good position. Foreclosure rates are up, home prices and down, and interest rates are still reasonable. True, rates are expected to begin to climb as government programs designed to keep rates low are removed, but that climb will be gradual. While the continued decline in real estate prices is a potential concern, the magnitude of the declines is likely to be minor, when compared to what we have already seen. The only challenge buyers face involves getting approved for a loan. Tighter lending standards and overly cautious banks are making it tough for some buyers to qualify for credit.

The Bottom Line
If you've got cash and don't need to worry about interest rates, it's a buyer's market. Supply is up, demand is down, and cash offers are a seller's dream come true. This is particularly true in the condominium market, where careful shoppers can pick up a real bargain.

The bleak outlook for housing is forecast to continue at least through the first half of 2010. Barring a miracle, it could persist for even longer. (The instruments found in A Guide To Real Estate Derivatives provide exposure to the real estate market without having to buy and sell property.)

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