Has anybody heard that google is going to be penalizing for linking with other real estate sites? Also, I've heard they are going to be penalizing for excessive numbers of link exchanges? Any validity to this?

They have penalized some Realtor sites in the past as a warning - see this blog post for more info. Link exchanges are usually just ignored by Google whether excessive or not but the sites are not usually penalized. So link exchanges for the most part are just a colossal waste of time in the end - especially if you exchange with an aggressive trader (which is just about anyone who emails you for a link exchange). Having said that, link exchanges done with carefully chosen partners with links not placed in obvious "link directories" - and in moderation - do still work.

Penalties do eventually occur however when the link exchanges appear to be organized - when they are set up by your template provider for example.

http://www.google.com/support/webmasters/bin/answer.py?answer=66356&query=link+exchange&topic=&type

Excessive link exchanges is a violation of Google's guidelines and can result in ranking penalties. The thing to remember though is the word "excessive": reciprocal linking happens naturally, and newbie webmasters often crosslink their network of sites, so Google is extremely forgiving as long as you do things in moderation.

The key is to exchange links in a way that doesn't fit a pattern, and to marginalize reciprocal links in your link profile. A majority of your backlinks should not be link exchanges or even one-way from pages that openly exchange links.

Reciprocal linking can be very benficial to your site! As TheRooster said though you do not want excess links. Select a few quality sites to exchange with and keep it low key. In other words having a links page is an obvious trade.
A good example is to trade with a local mortgage broker. Slip the link to that broker into your finance pages and he can do the same on his end when he discusses real estate. It is a natural link exchange that you both will benefit from in the search engines as well as in traffic.

Do it naturally and do exchange links to relevant sites only.