02/05/2009 05:12 am ET | Updated May 25, 2011

Housing Predictions

Notwithstanding a lot of negative information about housing prices, I believe we will see stabilization in the markets by mid-year. Here is my thinking:

The speed in which our economy crashed (housing and stock prices) is unprecedented. There were no economic models to predict what happened.

Once the decline started, the fuel behind the fire was individual's confidence (or rather, lack thereof) that the system would right itself. People (including lenders) began to believe that housing and stock prices were going to fall -- and that is in fact a self-fulfilling prophecy. Once people anticipate price declines, they adjust their conduct accordingly. Certainly there were fundamental economic reasons for the declines (#1 being inappropriate lending and borrowing) but the unusual speed and depth of the fall was, in my view, the result of personal anxiety, not economic criteria.

The good news is that since the free fall was to a large degree tied to loss of confidence in the system, a boost to people's confidence can stop the fall. What can provide that boost? January 20. That's the first day of a new Administration committed to restoring consumer confidence by pumping a trillion dollars into the economy and creating three million new jobs. You may not agree with that approach (raging inflation could be right around the corner) but the impact will be a shot in the arm. And with that shot in the arm, three things will happen in the housing world:

1) People worried about their future employment will stop worrying a little bit and venture back into the house buying arena.

2) Foreclosures will slow down as anxiety levels decrease and people who are under water (or close) will be less likely to send their keys to their bank. (In addition, the Obama Administration has indicated the high priority it places on preventing foreclosures through whatever it takes.) The slowing down of foreclosures will stop the cliff dive of prices (about half of all sales in the U.S. today are foreclosure-related -- a huge downward draft on pricing).

3) Lenders -- acting today in their usual fashion by swinging in the extreme from too much lending to too little -- will start to act rationally and mortgage money will free up.

The result will be a stabilization of housing prices.

As Robert Shiller (famous for his book, Irrational Exuberance) wrote in his recent book, The Subprime Solution, the housing boom was to a great degree about "social contagion," the thinking of the masses about housing prices. "Most people do not understand the true nature of the bubble and try to think of speculative events as rational responses to information."

Just as the bubble and now bust were caused by a mass mania, the rebound, too, will happen once enough people believe that the economy is finally righting itself.

Jim Randel is the author of the just-released book, The Skinny on The Housing Crisis (Clover Leaf, 2008).