A lot of people are asking what I think will happen in the housing market in 2012. But rather than just give a laundry-list of predictions, I’d like to share my thoughts within the context of steps that different type of readers and clients may be considering.

First, a general note on the housing market… Overall, I expect 2012 will be very similar to 2011. Not much inventory, stagnant-to-slightly-lower home prices, and I expect we will end 2012 with mortgage rates very similar to where they are today. Even though there are massive risks out there, such as the enormous shadow inventory of distressed homes, Europe falling apart, and a global economic slowdown, the last four years have proven that all of this can take a long long long time to play out. Our policymakers are hell-bent on kicking the can down the road. Especially in an election year, I wouldn’t bet on too many fireworks.

Prices are determined by the balance of supply and demand. Currently, our demand isn’t great, but supply is even more pathetic. Unless there is a lot of new supply, I wouldn’t expect prices to tank in 2012. Large amounts of new supply could come from either the backlog of foreclosures coming to market quickly, or a big change is social mood where lots more underwater sellers decide they’ve had enough and put their homes on as short sales. This is in large part why Europe, China, Occupy Wall Street, the stock market, and even Ron Paul matter: they affect social mood, which will drive people’s willingness to own real estate.

Sure, there could be a black swan-type of event that could instantly and profoundly impact the Bay Area’s housing market, but that just isn’t likely. Most likely, is simply another muddle-through year like 2011.

One quick note on all of the forecasters that are predicting home prices to bottom in 2012… These are the same clowns that have been wrong every year since the bubble began to pop. And most of them are the same ones that made predictions during the bubble that home prices would rise at 10%+ per year forever. Do not listen to these people.

So what does that mean for you?

First-Time Homebuyers

2012 could be a great year to buy your first home, as long as it (and you) meet some specific criteria. And know this: please do not feel like you have to buy now because prices could go up. Even when prices to eventually begin to rise (organically and for real), they will rise slowly. You aren’t going to be missing anything by waiting in terms of price appreciation.

If you are going to buy your first home in 2012:

• Make sure that it is somewhere you will be happy for at least five, preferably ten years. Why? Because it may take that long for it to be worth again what you paid for it. Keep in mind as well that a home really needs to appreciate about ten percent just for you to break even with all of the buying and selling costs accounted for.
• Make sure the place is big enough and in the right school zone. Buy a place that your family won’t outgrow.
• On that same note, seriously consider NOT buying a condo.
• Don’t be upset if the home continues to fall in price over the next couple of years. Today’s $400,000 could be 2014′s $300,000. You need to be honest with yourself about how well you would cope with this.
• Have a reason other than “building wealth,” like starting a family, etc.
• Don’t stretch yourself financially. Just because you qualify for $500,000 doesn’t mean you should spend $500,000.
• Get a 30-year fixed mortgage.
• Don’t feel pressure to buy because rates are low. Remember that home prices are a function of mortgage rates. If rates rise, prices will fall accordingly. Point is, low rates don’t necessarily mean it’s the “best” time to buy.
• Consider rent. Could you rent the same house for the same as it would cost to own it? If so, what’s the hurry to buy? Conversely, be sure you could the house you buy out for a price that would cover your monthly costs. Just in case.
• Finally, do some homework on the area you are buying in. How much would the house have been worth at the peak? How much has it fallen? How much was it worth back in 1996 before the bubbles began? This might be a reasonable way to approximate a worst-case scenario.

Homeowners With More Than Twenty Percent Equity

If you’ve got lots of equity and are considering selling, 2012 could be a great time to move up, down, sideways, or cash-out and rent for a while. You are in the extremely fortunate position of being able sell and have the cash to buy the house for the next phase in your life.

For some reason, common advice from the rest of my industry would be to wait, because… if you don’t have to sell, why would you? To me, this is bass-ackwards thinking. Today, you can cash-out and rent while you still have a equity.

Think of it this way… if you are going to sell one house and buy another immediately afterwards, it really doesn’t matter what type of market you sell in, as long as you have the equity to logistically make the move. If you wait until your house goes up, the price of the house you’ll buy will be higher too and you are no better off. But if you wait and your house keeps dropping, you risk becoming physically incapable of selling and having enough cash to buy again.

If you aren’t in the house you want to be in for the next ten years, then now is the time to make the change.

Homeowners With More Than Ten Percent Equity

You homeowners are also lucky enough to be able to sell and still walk away with some cash in your pockets. Maybe it’s enough to put down on another place with an FHA loan. Or, maybe it’s enough for first and last-month’s rent. Either way, there are tens of thousands of homeowners around here who would love to have the opportunities you have today.

Even though you probably think your situation sucks.

The bottom-line is this: today you can move, but by this time next year it could get iffy. Take a good hard look at this long-term Case-Shiller chart, and this one that breaks it down by price tiers.

If you aren’t where you want to be for the next 5-10 years, then 2012 is definitely the year to make a change. The sooner the better.

Homeowners With Less Than Ten Percent Equity

Your situation is obviously more dire. If you are where you want to be (and you can afford to be there) for the next 5-10 years, then stay. But if you are going to be moving at some point in the next few years, you have better do it now, while you still can.

Even if you have to bring a few thousand bucks to the closing table, it’s a lot better than having bringing tens of thousands of bucks, or doing a short sale.

Logistically, you are most likely going to get your best price this Spring, with prices fading by the Summer and Fall. The time to act is now.

Rent. Save up cash. Or if you have extra cash and want to get an FHA loan to buy again, go for it.

You’d better act now while you still have some good options left.

Homeowners Already Underwater

If you are already underwater to the point where bringing extra cash to the closing table isn’t an option, you have some tough decisions ahead.

First, you have to decide if the home you are in is the place you want to be for the rest of this decade. If it is, then keep it, love it, enjoy it, and slowly pay it down without paying too much attention to home prices because they don’t matter to you.

But if it’s not, then you have to decide to take your pain now, or likely later. And by pain, I mean a short sale. Generally speaking, you are going to be renting for 2-3 years after you complete your short sale. And, given that home prices are still slowly falling, this probably isn’t going to be too bad of a thing.

Consider this: people who did short sales back in 2009 or earlier can probably qualify for a mortgage today. Many of them will be buying homes over the next couple of years.

The real issue for you is: Do you want to be buying a home again in 2015? Or even later than that?

It’s said that the best time to plant a tree was ten years ago. The same logic applies to short sales. If you are going to do it anyway, you are better off doing it now and starting the healing process.

For more information on short sales, read the very detailed How Short Sales Work.

Homeowners in Foreclosure

If you are one of the many thousands of Bay Area homeowners who are behind on your payments, you have three options. And, it helps to be proactive.

1. Get a loan modification. For most, it’s worth a shot. If you haven’t applied, it’s probably worth a shot IF you want to keep your home for the next decade.
2. Do a short sale. Again, read How Short Sales Work. If you are in the East Bay, I can help you.
3. Walk away. Live free for a while. Save some money. Maybe ask your lender for a Deed in Lieu. If you just want it over and you don’t want to do a short sale, I would absolutely recommend contacting Jon Maddux and the folks at You Walk Away for further advice.

Trust me, if you are in this situation, you are not alone. Probably not even alone on your street. And, it’s not a death sentence. Life will go on and probably get much better from here. In the grand scheme of things, a house is just a house. And, yes, you will own another one someday.

The important thing is to get educated in 2012. Take charge. I recommend reading the very detailed How Foreclosures Work.

Renters

If you are currently renting, I would consider all of the same points I raised for first-time homebuyers. Especially if you are comfortable where you are, there is no reason to feel urgent about buying a home in 2012.

A common complaint from renters is that they could afford a mortgage for what they pay in rent. But consider as well that, if the price of your “target” home is falling at $20,000 per year, you are still $20,000 ahead each year by not renting.

In the Bay Area, many renters have been “saving” $50,000 to $100,000 or more each year, simply by staying on the sidelines.

This isn’t to say that we all need to try and time the exact bottom of the market. But if that kind of thing does plan into your calculations, rest easy knowing that the bottom isn’t here yet.

Investors

2012 is simply too early for most investors to buy-and-hold. There. I said it.

Why?

Because we aren’t at the bottom yet. Not even at the low end. Not even in Antioch, Richmond, or Concord.

So if you want to buy-and-hold in 2012, think of it as averaging-in to the stock market. If your plan is to buy ten homes over the next four years and you want to buy one or two in 2012, then great – that’s a solid, reasonable plan. Go for it. And if you’re in the East Bay, I can help.

But if your goal is to buy one or two rentals to help put your kids through college, then wait. There is no reason to buy now. Keep your powder dry.

Personally, I would rather buy one year too late than potentially three or four years too early. And whatever great returns you are getting today won’t make up for even better opportunities missed down the road.

It really all depends on your goals and how much cash you have to play with. Just know that there will be downward pressure on prices, especially at the low-end, until the bulk of the foreclosure mess is behind us. And we’ve still got a ways to go.

One option that may make sense for some of you is to invest in apartment buildings, bought at the right price and in the right Bay Area neighborhoods. If you are an accredited investor with $50,000-$100,000 you would like to passively invest in apartments (partially as a demographics-play), then there are some interesting opportunities out there. Please send me an email and we can discuss it further.

Final Thoughts

The housing decline that began in 2005 is entering it’s eighth year. It’s hard to believe that we still have so much deleveraging in front of us. Back in the beginning, I figured prices would crash after three or four years, hit bottom, and then the healing would begin – like ripping a bandage off quickly.

Obviously, that’s not happening. The bandage is getting pulled back slowly, prolonging the economic pain for all of us. I don’t know what the next few years will bring other than that there is still quite a bit of the bandage left.

That doesn’t mean that we need to put our lives on hold. Depending on your and your scenario, 2012 can be a great time to take action. I would just rather you take that action with a realistic understanding of what’s coming, instead of acting on the kool-aide-and-unicorns advice of NAR, CAR, and so many other disingenuous “forecasters.”

Take care. Good luck. And let us know if there is anything we can do to help you.