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12 Housing Themes for 2012

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In general, opportunities for good investments outweigh the risk of further losses.

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As 2012 rumbles out of the gate, the US housing market correction enters its sixth year. By all accounts, it's been the worst real estate slump in generations, as housing bears troll through data releases looking for ominous warnings that vindicate their view that homebuyers and investors alike should shun real estate. They have a point, but record foreclosures, bloated inventory and home price declines are anything but news.

They are also missing the point entirely: The time to be bearish on housing was in 2005, not 2012.

For those not in the market, who get their color from the blogosphere and headline-selling financial press, the housing market is a mess: Foreclosures persist, unemployment is high, Europe is in turmoil, growth in China and the other BRICs is slowing and banks are doing their best to avoid giving out loans. And that's all true.

But come December when we look back at how the housing market fared in 2012, this will not be a year remembered for how bad it was, but for how bad it wasn't. Over the course of the six-year housing correction, immense amounts of risk have been bled out of the market to a point where, in general, opportunities for good investments outweigh the risk of further losses.

Below are 12 themes for housing in 2012, and while not all represent rosy optimism, they support my continued view that housing bears are seven years late to the party. And while bulls may be early, the good ones always are.

1. Bottom Calling
All of a sudden it's cool again to call the bottom in the housing market. Already, some prominent pundits and analysts have said 2012 will mark housing's nadir. Goldman Sachs (GS) came out with a report in December predicting that the widely-watched Case Shiller Home Price Index would slip in 2012 but find a bottom. Optimism that Goldman's forecast will come true should be tempered, however, since real estate website Zillow (Z) -- a company built primarily on providing consumers misleading information about their home's value -- recently published a report of their own pointing to 2012 as housing's low point. And remember, in 2009, 2010 was supposed to be the bottom. Then it was 2011. Midway through this year, if housing remains weak, look for those bold analysts to backpedal, finding unforeseen circumstances that rendered their predictions null.

2. Robo-Signing Hangover, Cured?
This time last year, the housing market was holding its collective breath as the robo-signing scandal broke, revealing shoddy foreclosure processes, first at Ally Bank (formerly GMAC), then Bank of America (BAC), JPMorgan Chase (JPM) and nearly all the country's biggest lenders. The repossession machine ground to a halt, resulting in limited supply of new foreclosures coming to market. Banks scrambled to "investigate" their procedures, uncovering a litany of practices that were sloppy at best, illegal at worst. Even firms like Lender Processing Services (LPS), which provides back office support and services to the mortgage industry, got wrapped up in the scandal. As a result, foreclosures virtually ground to a halt in 2011, which helped prop up prices in the first half of the year. In many areas, price declines accelerated into year-end as banks resolved their robo-signing issues again and restarted the foreclosure machine. 2012 looks to be another year heavy in foreclosures, but with hoards of cash buyers looking for distressed properties, it will take a true deluge of inventory to overwhelm pent-up investor demand.

3. Geopolitical Uncertainty
The world is a mess. The list of geopolitical tinderboxes that could catch flame at any moment is too long to reprint here. Suffice to say, every asset class on an investor's menu is laced with risk, many of which have little to do with the fundamentals of the investment itself. And with risk at all-time highs and returns on savings at all-time lows, steady, cash-flowing assets are starting to be seen as more attractive than they are boring. This flight to quality is one of the reasons cities like San Francisco, New York, Boston and Washington have seen investors flock to their Class A properties. A world where demand dries up in midtown Manhattan or downtown San Francisco is an ugly world indeed, and many view real estate a safe "as long as the world doesn't completely implode I will be OK" bet.

4. Foreclosure Rental Program
The latest in a string of Washington-directed solutions to the housing market's woes is the turning of millions of foreclosed homes into rentals. The Federal Housing Finance Agency, which oversees Fannie Mae (FNM.OB) and Freddie Mac (FMCC.OB), received over 4,000 proposals after requesting ideas on how to structure its program to rent foreclosed homes. All the big players tossed their hats into the ring, in addition to financial firms like Fortress Investment Group (FIG), Deutsche Bank (DB) and Barclays Capital. With rents rising and home prices falling, regulators and politicians alike think they may have found a way to not only keep bank-owned homes from pushing home prices down any further, but earn a couple bucks in rental income in the process. And while major lending institutions are playing ball to show they don't relish in kicking Americans out of their homes, the logistical challenges to managing nationwide rental programs are, in a word, significant. Time, and data on actual REO homes turned into rentals, will prove out just how successful the initiative ultimately is and how much of it is political fluff.

5. Return of alternative lending
So-called "exotic" lending during the boom was one of the chief culprits in the housing market's eventual collapse. But to think that alternative lending has no place in the market is plain ignorant. Through Fannie Mae, Freddie Mac and the Federal Housing Administration (FHA), government-backed mortgages – and their strict guidelines – dominate the current market for home loans. But increasingly, small originators are gaining market share by offering more flexible loan products. No one will call the loans "Alt-A" or "Subprime," but that's exactly what they are. But from the guidelines my firm has has seen, underwriting is far more reasonable and responsible than it was during the boom. Good borrowers with dinged credit or alternative income situations have been locked out of the mortgage market since the crash – bringing them back in will be a positive headwind for housing in the coming years.

6. Multi-Family Momentum
The hottest sector in real estate right now is multi-family. It seems like everyone wants to buy apartment buildings, in particular in coastal metro markets where rents are going through the roof. Cap rates have compressed to levels not seen since the market's peak, interest rates are low (although loans are still a challenge to get funded) and money is pouring into the market. In Class A markets like San Francisco and New York, competition is heated for big buildings. But with smaller investors still reeling from the downturn, the small building market (5-20 units) is still awash with opportunities. Strong demographic trends (more below) that favor the rental market lead us to believe that apartments are hot for good reason, and should stay that way for the foreseeable future.

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