2012: The Beginning of a Long Bottom for Housing

If you’ve bothered reading the real estate section of just about any newspaper or website, you’ve probably seen more bottom calls than you can count from various real estate professionals since the housing market totally fell apart in 2008. So let’s be up front here.

Yes, we are a real estate brokerage. We make our money by helping people buy and sell homes.

And yes, this is another bottom call. Well… sort of.

Did we come here today to tell you that you need to buy a home right now because any day now prices are going to start shooting up again and if you don’t buy today you’ll pay more tomorrow? Hell no.

We’re not interested in trying to convince you that now is or is not the right time for you to buy or sell a home. We’re interested in the data, and we haven’t been shy about predicting further declines on these pages and elsewhere in the past when that’s what the data suggest.

A year ago we said sales would be up in 2011, and despite the unfair comparison of a 2011 with no tax credits to a 2010 that had the homebuyer tax credit in effect for half the year, 2011 did indeed see about 2% more sales than 2010 in the markets we serve across the country.

So what do the data suggest today? What’s in store for the housing market in 2012?

Buyers Coming Back

Let’s dive into the data. Compared to a year ago, this January…

• Redfin home tours were up 27%.
• Redfin offers were up 26%.
• Redfin website traffic was up 48%!
• Consumer Confidence was up 23%.

So it would seem that buyers are certainly returning to the market, hungry for something to purchase. And with rents across the country beginning to climb slowly as well, the math is making sense for more people with each passing month. But what’s going on with closed sales? If there’s so much demand building out there, why the one percent dip in buyers actually purchasing homes so far this year?

To put it bluntly, selection sucks!

Sellers Missing in Action

Let’s go to the data again. Compared to a year ago, this January…

• Total new listings were down 17%.
• New non-distressed listings were down 10%.
• New REO listings were down 33%.
• New short sale listings were down 20%.
• Total on-market inventory was down 26%.
• Bank repossessions were down 35%.

It’s fairly difficult for sales to see a substantial increase when there just isn’t anything out there to buy. We’ve been hearing it from our customers for months, and their cries are only increasing in intensity as the expected seasonal bump in selection has failed to materialize with the new year.

Just since the beginning of the year, over half of offers submitted by Redfin clients have been on homes with multiple offers, a number that is rising rapidly every month, even through the winter—traditionally real estate’s slow season. Those rare times when something good hits the market, all of the buyers seem to immediately descend at once. This issue is most pronounced in California, where our buyers encounter multiple offers nearly two thirds of the time.

Prices Likely to Roll Along the Bottom

So what does this all mean for home prices? We agree with Bill at Calculated Risk. For home prices around the country, on average the bottom is here.

On the way up, it took a year or two for increased supply and shrinking demand to turn into home price losses. We’re now heading into Year Two of the opposite pattern: supply is shrinking and demand is on the rise. Expect prices to hit the bottom in most markets this year (barring another complete economic collapse, of course).

Of course, the catch is that we’re likely to be here, at the bottom, for quite a while. As in, years.

In some markets where investor activity is heating up (Phoenix), or inventory is especially slim (SF Bay Area), prices may rise somewhat on certain types of homes. In the Bay Area, our buyers have been coming up against multiple offers (many of which are all-cash with no contingencies) in almost three out of every four offers so far in 2012. It’s hard to imagine prices continuing to drop in a situation like that. But overall, the continued slow release of foreclosures by the banks coupled with a steady flow of short sales by underwater home owners will put a damper on prices as the excesses of the housing bubble work their way through the system.

“Shadow inventory” is a term that has been thrown around a lot in the last few years, overused even, but the fact remains that the banks are currently sitting on tens of thousands of homes across the country that they have foreclosed and not yet listed, along with tens of thousands more homes somewhere in between the first missed payment and the actual foreclosure. The banks can only process these so fast, especially now that the light of day has shone on the shady robo-signing processes that allowed them to push through so many foreclosures between 2009 and 2011. We’re talking at least three years’ worth of backlog in foreclosed home inventory at the banks.

Any sign, however slight, that prices may be on the rebound will cause banks to release more of their inventory onto the market, along with a wave of pent-up supply from would-be sellers on the margin to rush to list their homes to take advantage of the “recovery.”

Nationally, prices will probably move ±1% between January 2012 and January 2013. We expect 2012 sales to come in at least 5% higher than 2011, and inventory to be 20% or more below 2011 throughout the year.

We’re slightly more optimistic than our friends at Zillow, who recently predicted an average drop of 3.7% in national home prices during 2012. Meanwhile, famed economist Robert Shiller says that home prices are “not overpriced anymore,” but that “the question is whether we’ll overshoot.”

2012 Won’t be a Cakewalk

Unfortunately, although home prices may be rolling along the bottom in most markets this year, the squeeze on inventory means that buying a home in 2012 is likely to be a frustrating, lengthy experience. And while sellers may be excited about the lack of competition on their street, they probably won’t be thrilled about how much they can sell their house for.

2012: Welcome to the housing bubble hangover.