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2013 Housing Outlook: What if the Consensus Is Wrong?

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For this outlook piece, let's not just assume that the consensus is wrong, but let's go against the anti-consensus consensus. Double secret contrarian, if you will.

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To me, consensus seems to be the process of abandoning all beliefs, principles, values and policies. So it is something in which no one believes and to which no one objects.
– Margaret Thatcher

It's hard to find a prognosticator not painting a cautiously optimistic outlook for housing in 2013.

This, in and of itself, should be cause for alarm: The consensus is usually wrong. Witness every January when so-called experts release their bold predictions which, inevitably, end up being just as off base as they were the year before.

Limited inventory, a slowly mending job market, waning foreclosures, and low interest rates are all cited as reasons for a rosy outlook for housing. But geopolitical tensions, Washington gridlock, and the specter of rising interest rates should temper our optimistic expectations. This groupthink is pervasive, nothing more than repetitive bullet points echoing the view that housing has bottomed, the worst is behind us, and we are likely to see moderate appreciation in 2013.

And since pretty much everyone has bought into this view, it will probably turn out to be wrong. So what should we be thinking about as 2013 kicks off?

Every January, well-known investor and market theorist Doug Kass puts out a surprise list for the coming year. As usual, it's worth a read. What's notable about his list aren't the topics, per se (which range from predictions about bond yields to who will win the Super Bowl), but the rationale behind the exercise.

As Kass explains:

It is important to note that my surprises are not intended to be predictions but rather events that have a reasonable chance of occurring despite being at odds with the consensus. I call these 'possible improbable' events.

The real purpose of this endeavor is a practical one - that is, to consider positioning a portion of my portfolio in accordance with outlier events, with the potential for large payoffs on small wagers/investments.

The point isn't to make predictions or make huge bets on low probability events, rather to assume the consensus is wrong and go from there. When you think against the grain, good things happen. And while being contrarian doesn't guarantee you'll get it right, it forces you think in a way most people aren't. Greatness is rarely achieved by following the herd, and great investments are rarely made by being late to the party.

For this outlook piece, we are not just going to assume that the consensus is wrong, but we are going to go against the anti-consensus consensus. Double secret contrarian, if you will.

Those who don't buy into the consensus view for housing in 2013 generally expect the housing market to take another nosedive (the exception of course is Realtors, who still believe home prices never go down). It's not that farfetched: foreclosures and short sales are still ailing many markets, much of housing's recent strength has been government-spurred, uncertainty looms over the fiscal cliff debt ceiling, Europe is still a mess, the Middle East could blow at any second, and emerging market economies like China and India are struggling.

Indeed, there is much to worry about. But to borrow a line from Goldman Sachs CEO Lloyd Blankfein, "One of the biggest risks that people have to contemplate is that things go right."

So without further ado, here are our top 10 reasons why housing is in for a banner year in 2013 and will (once again) prove the consensus wrong.

1. Foreclosures Drying Up

Throughout California, foreclosures were down sharply in the past 12 months. According to foreclosureradar.com, a data and tracking site, notices of sale (often the final legal step prior to actual repossession) in California were down more than 56% in 2012. The trend held across the Bay Area:

San Mateo County: -71.4%
Alameda County: -65.5%
Santa Clara County: -61.7%
Contra Costa County: -59.5%
San Francisco County: -55.2%

The trend is being mirrored across the country, with Florida a notable exception. As further evidence, housing news outlet Housing Wire recently changed the moniker of their annual real estate conference from "REO Expo" to the "Real Estate Expo," to reflect the waning impact foreclosures are having on the market.

Fewer foreclosures in the mix helped sale price data look better than it probably was last year. Coupled with a more optimistic view of the market in general, prices are rising and more homeowners are climbing out from being underwater.

As long you don't have to keep a fence around your pool to keep the gators out, this positive trend should continue in your local market.
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