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Lyrics to Bumpy Ride by Robyn:

Even though it’s a bumpy ride
Keep your head above the waterline
Keep focused and you’ll make it through
Keep on rollin’ is what you’ve got to do
Even though it’s a bumpy ride don’t you slip and don’t you slide

The second decade of the third millennium has begun and there are a number of events to look out for this year that could affect the real estate markets both locally and nationally.

1. U.S. Avoids the Dreaded Double-Dip

The threat of the double-dip has haunted America since “green shoots” were spotted by Ben Bernanke back in April of 2009. Fears were recently stoked by the release of the latest S&P/Case-Shiller Index showing declines in 18 of the 20 cities represented in the index. However, expect the tax cut extensions and payroll tax decrease to keep the U.S. out of recession. GDP growth will likely be in the 2.5% range (+ or – 50 basis points), not nearly enough to put a significant dent in unemployment, and most will use the tax cut savings to pay down bills.

2. Homeownership Rate Will Continue to Decline

The homeownership rate in the United States peaked in 2004 with 69.4% of the population owning their primary residence. That number has now slid to 66.9% and could reach as low as 62% in 2012 (the lowest level since 1960). Although historically low pricing and interest rates should be assisting buyers in the market, there are a number of factors that continue to put pressure on the homeownership rate. Stubbornly high unemployment continues to prevent many purchasers from making large financial decisions, whether they are currently unemployed or simply fearful of the possibility that they could be. Additionally, the millions of owners who lost their properties in foreclosures, sold them in a short sale, or defaulted before selling the property in a traditional sale, are now struggling with tainted credit and tighter credit guidelines in the mortgage market. Finally, the current administration has suggested that it could reconsider some of the policies that have been at the foundation of the increased homeownership rate in the past half-century including the mortgage interest deduction, public-private partnerships (i.e. FNMA and FMCC) that subsidize the mortgage industry and keep interest rates low, and capital gains tax exclusions for primary residences.

3. Issues With MERS Could Slow the Foreclosure Process

State Supreme courts have begun to question the legal standing of the Mortgage Electronic Registration System (aka “MERS”). MERS is a privately held company formed in 2004 that operates an electronic registry designed to track the ownership of mortgage loans nationwide. Essentially, the company asserts to be the mortgage owner’s nominee for the security interest (the mortgage or deed of trust) indicated by the notes transferred by lenders, investors, and their loan servicers in county land records. Wall Street used MERS to speed the securitization process and later foreclosures. Courts have addressed a number of legal issues regarding the system including the electronic notarization of documents, the legitimacy of notarizations done across state lines, and whether the company has standing to act as the plaintiff in a mortgage foreclosure. Expect Congress to address reform in 2011.

4. Foreclosures Will Increase

According to CoreLogic Inc., more than 10.8 million homeowners, or 22.5% of all mortgage borrowers, are underwater. These owners cannot sell without a short sale and are at risk of defaulting if any additional pressure is put on their household income or if they decide a strategic default is in their best interest. Legal issues including the robo-signing scandal, issues with MERS, and continuing pressure from States’ Attorney General have slowed down the foreclosure machine in many states, but expect that process to reverse in early 2011. That reversal should eventually help to clear out the market. However, shadow inventory persists in many forms (i.e. owners who defaulted but who benefit from slow foreclosures in judicial foreclosure states, REO on the books of banks but not released to the market, and inventory held by private owners who are waiting for a market rebound to attempt to sell). All of this increased inventory along with decreasing national demand will likely lead to a slow housing recovery at best.

5. Apartment Living Will Continue to Increase

With the homeownership rate continuing to slide demand for apartment housing is on the rise and will continue to be for the foreseeable future. Demographic trends that point toward increased demand include overall population growth, echo boomers entering the housing market, continued high levels of immigration, a continued shift in household composition away from the traditional married couple with children toward single person or single parent households, and a return to urban centers by populations currently living in the suburbs. The increased demand has already placed upward pressure on rental pricing nationwide and a lack of inventory and planned multi-family housing starts in the coming years will continue to do so.

6. Bankrupt Municipalities and Broke States

We can expect Detroit and at least one other city in Michigan to go bankrupt this year. Other potential victims of municipal largess and dwindling tax revenues include Los Angeles, Miami, Oakland, Houston, and San Diego. The discussion of such events is already affecting the bond markets. In legal circles, discussions are developing on the prudence of amending the law to permit states to file (think Illinois, California, Arizona, and Nevada). Currently, states can run out of money but do not have the protection of bankruptcy. The formal process of debt discharge may be the quickest road to recovery available and the only way to deal with massive unfunded obligations such as pension contracts. Additionally, now that Republicans have taken over the house and a large minority of the Senate, we can expect less enthusiasm for any plan to redistribute federal funds to states. This will certainly lead to continued cutbacks and major reductions in public services.

7. Unions Will Be Under Attack

Due to growing budget deficits and a public backlash against massive benefit programs, elected officials from states such as Maine, Ohio, and Arizona are pushing legislation to limit the power of labor unions, particularly those representing government workers. New governors are looking at every line item of their budget and finding that the salaries and pensions of government employees make up a significant portion of state budgets. Particularly in Republican states, politicians are pursuing aggressive structural changes aimed at weakening the bargaining power and political influence of unions, including ones in the private sector.

8. China Overheats Before the U.S. Recovers

Analysts have a close eye on the Chinese government as it takes steps to rein in inflation without derailing its red-hot economy. China may be expected to grow at 5-6% this year, but that is nowhere near as much as their government wants or the world expects. These could lead to the bursting of their property bubble and could pressure commodities as well as possibly derailing the global economic recovery.

9. Property Bubbles Finally Deflate in Australia and Canada

Australia, who has largely avoided the global recession may see its luck come to an end. Expect their economy to come to outright recession and look for Canada to slow as its real estate markets deflate. In November, The Economist released a report stating that Canada’s housing market was overvalued by as much as 24%.

If you would like to speak to a member of our team about about how to customize your investment strategy in Manhattan or Brooklyn or to speak about finding a new home in the area, please call (212) 400-4838 or e-mail yourkeytothecity@AkerlyRE.com.