"Prices are going to go down a little bit more, and if there’s nothing but bad news out there, (which is) what we’re seeing, then that must mean that at some point we are hitting the trough, and we feel that 2011 is finally going to be that point," said Scott Sambucci, the company’s vice president of data analytics.
"That doesn’t mean that we’re instantly going to bounce out of the trough. Expect local price volatility," he added.
Early 2011 will bring the usual seasonal bounce in prices, Sambucci said, though the "bounce" will be more of a "shelf," more akin to this year’s period of price stabilization before the expiration of the homebuyer tax credits than the steady climb in the spring of 2009.
Altos’ latest housing market update projected that an uptick in seasonal demand would start to be visible in the third week of January.
But two supply trends will ultimately drive prices lower next year: rising inventory and the lower quality of that inventory. Inventory rose 30 percent from the beginning of this year to its peak at just above 300,000 homes, the company said. In 2011, Altos expects inventory will rise 25 percent, back to 2008’s peak of about 330,000, what Sambucci called "crash levels."
That increase in supply will exert downward pressure on prices, Sambucci said.
Sellers are already expressing some distress in the form of price reductions, he added. Post-housing crash, from mid-2007 to the end of 2008, the percentage of price-reduced homes was elevated in the 40-45 percent range.
During the tax credit period, all of 2009 and into the spring of 2010, the share of price-reduced homes fell to about 31 percent as a result of more buyer demand. Post-tax credit, that share has been rising, and price reductions stand at about 41 percent, according to Altos.
The quality of the homes coming on the market will also drive down prices. Foreclosures of homes mortgaged in 2007 and 2008 are starting to hit the market now and will continue to pour onto the market in 2011.
Those bank-owned homes (REOs) are likely to be in significant disrepair and demand lower prices, Sambucci said, therefore, real estate professionals may see a rise in transactions next year, but that doesn’t necessarily mean that prices will rise.
"Even if it’s not a tsunami (of REOs hitting the market), but a trickle, those are homes that are going to require the buyer invest cash to make the homes livable. Those are homes that have copper pipes stripped out, there’s holes in the roof, there’s windows missing. That’s just the nature of the REO in a lot of cases," Sambucci said.
In those instances, speculators and investors can serve as a "lubricant" between the banks and "regular" first-time homebuyers, he said.
First-time buyers putting down 3.5 percent on an FHA loan typically don’t have enough cash to fix up a damaged home. Investors can buy those homes at depressed prices, repair them, and quickly resell them at a higher price, therefore helping pull prices up, Sambucci said.
Altos Research expects the housing recovery to start in about a year. From 2012 to 2014 or so, the company expects the market to stabilize and slowly improve, though high unemployment, high inventory, and low quality will keep prices low even as transactions pick up over time.
"It’s going to be a slow, bumpy ride for the next couple of years," Sambucci said.