Conclusion

The outlook for 2010 was summed up appropriately by Dr. Alex Villacorta, Senior Statistician at Clear Capital, when he stated: “The sustainability of the current price gains will be challenged in 2010, given that most lenders and analysts predict a significantly larger number of REOs will reach the markets. Further, this suggests that as the dynamics of supply and demand evolve, different markets will have varied responses to the increased REO activity. That is to say, depending on the market, if the supply of housing does not dramatically increase for reasons outlined in the previous section, or if demand does not become curtailed due to reasons explained above, then it is believed that housing will have bottomed in most affordable markets and will stay flat or experience modest price growth. Top-tier, less-affordable markets remain weak and unbalanced.

However, despite any promising data today, there are a multitude of reasons to believe that the fundamentals recently supporting stability in the housing market will diminish in 2010. Specifically, the reduction of loan purchases by the Federal Government and subsequent increasing interest rates, the expiration of the tax credit, and the continued weaknesses in the overall economy will likely stymie demand in 2010. Furthermore, the failure of loan modifications to prevent foreclosures, and the anticipated increases in defaults from borrowers of Option ARMs and other loans, will serve as a continuing source of bank-owned properties to be liquidated in competition with one another and will greatly increase the inventory of homes. Any economics student can tell you that when supply goes up or demand goes down, prices must go down. And that is expected to occur in 2010. The extent of this price decline is undeterminable at this stage, but the risk is palpable.

Published with permission from "A STATE IN TURMOIL: Why The California Residential Real Estate Market Has Just Begun To Fall" By Eli Tene, Gil Priel and Jeff Woodsworth. This text may not be redistributed or reproduced without the written consent of its authors.