Bull vs. Bear: Will housing rebound?

December 27, 2010, 1:00 PM UTC

It’s a question many Americans want answered: Will the value of my home rise or fall next year? Smart minds fall in both camps — here are both sides of the coin on real estate.

One of the most closely watched sectors in 2011 will continue to be real estate – a wildly emotional and divisive topic that’s puzzled investors and economists since the housing bubble burst around 2007. Earlier this year, many observers thought the market would turn around in a big way as federal tax credits spurred home purchases and the economy added jobs following hundreds of billions of dollars of government stimulus spending.

As the end of the year approaches, the prospects of a real recovery look much dimmer. For one, it’s become clear that we won’t see a true rebound until we have job growth. With unemployment showing few signs of improvement so far, the bullish take on housing seems hard to swallow, especially when many experts say home prices still have room to fall before hitting bottom.

But a bullish take doesn’t necessarily mean that prices would significantly rise. These are unprecedented times, and even the more cheery views fall short of predicting a steady surge in home values.

Here’s a bullish and bearish look at real estate for 2011.

Bull: Buy real estate!

One of the most vocal bulls on housing for 2011 has been Bill Ackman, founder and CEO of hedge fund Pershing Square Capital Management. At the Value Investing Congress in November, Ackman made a bold presentation called “How To Make A Fortune,” highlighting why it’s the right time to invest in real estate.

Ackman laid out several reasons but some key points include: With the fall in home prices and mortgage rates still relatively low, affordability is at its highest level in decades. What’s more, while there’s clearly still a glut in the supply of unoccupied homes, it will start to decline given that the rate of home construction is at historic lows.

Some of Ackman’s points sound similar to the reasons billionaire investor Warren Buffett gave earlier this year for his prediction that the real estate slump would end by about 2011.

Of course, this doesn’t mean he thinks home prices will return to their 2007 peak. In Buffett’s annual letter to shareholders of his Berkshire Hathaway (BRKA), which owns real-estate brokerage and manufacturer Clayton Homes, he predicted that demand for homes would catch up with supply following a period where the glut of unsold property caused home construction to dramatically fall.

In 2009, housing starts (the supply side) were 554,000 – by far the lowest number in the 50 years for which Berkshire could date. “Paradoxically, this is good news,” Buffett wrote.

And with home prices falling, he said families who couldn’t afford to buy a few years ago would finally be able to afford to do so. Buffett put it this way: “Prices will remain far below ‘bubble’ levels, of course, but for every seller (or lender) hurt by this there will be a buyer who benefits.”

It’s anyone’s guess if Buffett’s position on housing will change much in his letter to shareholders next year. It also remains to be seen if Ackman will continue to trump his “How to Make a Fortune” pitch with the recent rise in mortgage rates. For now, at least, both investors see promise in housing.

Bear: What bottom?

While home prices have for the most part stopped their freefall, some economists believe they haven’t hit bottom yet.

Rick Sharga, a senior vice president at RealtyTrac, an online marketplace for foreclosure properties, recently told The Wall Street Journal that foreclosures for 2011 could top the estimated 1.2 million bank repossessions this year, which reflected an increase of 900,000 from 2009. This is partly due to the so-called “robosigning” mess that forced some lenders to stall a flurry of foreclosures.

While Sharga predicts that home prices nationally could still fall by about 5%, others say they could drop much more at about 10%.

Some might argue that further declines coupled with relatively low mortgage rates might just spur a flurry of home purchases, but Daryl Jones, an analysts at investment research firm Hedgeye says that’s unlikely given that credit standards at virtually all major lenders are much higher and typically require larger down payments that would actually add to costs. Jones also thinks that home prices could fall another 15% to 30%, which means homes are actually still overpriced and might not attract more buyers as Ackman argues.

And while home construction is at all-time lows, Hedgeye says the trend is probably not as promising as Buffett and Ackman might think. The supply of housing is still very high – the firm estimated in November that there’s still 11 months of supply on the market to absorb, which is close to levels seen in 2009.

With so many variables working against the housing market, the bearish takes becomes all the more convincing. But one can always hope they’re wrong.

Also on Fortune.com:

New Jersey warns foreclosure fiends

Why Warren Buffett is everywhere

Is deleveraging just a delusion?