Which way are housing prices headed in 2011?

CLARKONOMICS: Which way are housing prices headed in 2011? I’ve seen the predictions about a double dip in housing and all the disaster that’s supposed to ensue. But I don’t buy it.

Yes, there will be stories to make you gasp about incredible deals in your neighborhood because of banks dumping foreclosures. Many people will continue to steal deals as lenders work through all the REOs (real estate owned) on their books.

But it is my belief that housing is already in that bottomed out phase, give or take a little in some markets. We have been through the worst of the bad news and are now in a cycle that economists call “inertia bias.” Simply put, inertia bias is the belief that because housing has been in the dumps for 5 years, it will always be that way. But that’s not the reality.

If you look at the stats on building activity in the United States, the reality is that construction has gone down steadily from the end of the boom right through the bust. It’s gotten to the point that there is virtually no meaningful new home construction going on in the country. That’s good news. It will allow the oversupply of housing to be absorbed through natural household formation. But the real recovery will come when jobs return and people again buy homes.

So I expect in 2011 we will go through a period where we continue to work off the excess housing that was built during the speculative real estate bubble. On the other hand, could the experts be right about us being in for more pain? Of course, that’s always a chance too.

One notable exception to this whole discussion is the condo market. Larger cities in the United States had so much excess speculative building of condos that it makes the glut of single-family housing look like child’s play. The condo market will take some serious time to heal. That’s just a reality of the cycle. Condos are not ready for the healing, but I believe single-family homes are.