The housing market is in shambles, plain and simple. In communities across the country, thousands of once-vacated houses now sit empty, remnants of a burst bubble. The residential market has been unraveling for some time now, and every day it continues to deepen. At some point though a trough will form, leaving the market with nowhere to go but back up. Whether this point comes tomorrow or 18 months from now is really anyone’s guess, but it does have important implications for many.
At Debit vs. Credit, Joe recently wrote a post outlining a reason why he believes the housing market may have further to fall. This provoked me to gather my thoughts about the market and make a prediction for myself.
From this day forward, there are basically two possibilities…
Scenario 1.) The housing market will fall further:
There are no definite signs that the economic carnage is anywhere close to over. More job losses and lower income levels will equate to more foreclosures, flooding the housing market with an even greater supply glut while continuing to put downward pressure on prices.
The last few days on Wall-Street, in which stocks plunged to levels not seen in over a decade, indicate that the turmoil is still deepening. The housing market has taken an absolute beating over the past few years, but if the recession continues to worsen, it may be in for an even deeper slide.
Even if the market was ridded of the remainder of still-existing subprime mortgages, an ongoing recession would continue to wreak havoc on the housing market. As it stands though, we may be in for another round of foreclosures and bank losses due to outrageous lending practices. This segment from 60 Minutes, although a few months old now (it aired on 12/14), explains why another catastrophic wave of defaults could be bearing down (essentially from another round of subprime loans due to reset this year and into 2010- ‘Alt-A’ and ‘Option ARMs’).
Scenario 2.) The housing market is near a bottom.
Keynesian-style economics is on full-throttle now, as our government is racking up unprecedented deficits in a desperate attempt to spend our way out of this mess. President Obama’s recent announced housing plan is one such illustration, and it’s the biggest piece of news the real estate sector has received in quite some time.
The $275 billion dollar plan attempts to fight the problem in two ways. First, it directly spends $75 billion trying to keep people in their homes, hoping to slow the onslaught of foreclosures. The rest would likely go to financial backing for Fannie and Freddie. President Obama acknowledges that it won’t be a cure-all fix, but he believes it will save a great number of people from the possibility of losing their homes. In his own words- “It will prevent the worst consequences of this crisis from wreaking even greater havoc on the economy. And by bringing down the foreclosure rate, it will help to shore up housing prices for everyone.”
It’s a tough call to predict how Obama’s plan will pan out. Nobody, not even the president himself, believes it can successfully end the tidal wave of foreclosures, but it will hopefully provide at least some stability for the time being.
The Wild-card: Interest Rates:
For the prospective homebuyer, home prices are definitely a major concern. If the aggregate price level of homes has another 10-15% to fall, then it likely would make sense to hold off on the buying until that point, but not necessarily.
If you are considering home ownership now, and you have the financial stability to receive a bank’s business, I would seriously consider looking for a home right now. Interest rates are basically at a floor; there’s literally no way they can go much lower. They can, however, go back up- big time. With all the money being created out of thin air to throw at our economic problems, it’s virtually a given.
If you have the option to get into a home right now (or refinancing) at an attractive fixed rate, say 5%, I wouldn’t hesitate for a second. Your outlook on the industry should be mostly irrelevant compared to the available financing options you have. Even if the value of the home sags slightly for the next year or two, the dirt-cheap credit you locked in makes it well worth it. Six months to a year from now, these opportunities might be long gone (dare I say double-digit inflation and interest rates?), and many prospective buyers will be kicking themselves for hesitating.
Popularity: 62% [?]