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).
Wages are at abysmally low levels, manufacturing is way down and unemployment is way up. With ridiculous taxes due to over-valued properties which it seems every town in the nation managed to evaluate properties at the peak of the bubble - it has only just begun. Credit is still frozen and many are stuck where they are with or without a home and if it is the later their credit history has been obliterated. Interest rates can only go up. Millions of properties have been vandalized and looted throughout the nation and if local or federal governments get involved it will simply drive the price down further.
Nope, this is just the beginning of the decline - like I said, nice try though.
But it's even worse than that. This year there are $500 billion in pay option ARMS that are due to begin resetting during 2009. That means more jingle mail and more foreclosures. Most of this will happen in California which already has the nation's third highest unemployment rate.
Unless a Federal bailout helps these homeowners, don't look for the housing market to return to normalcy until sometime during 2011.
Then again, I think he's talking about those other than the middle class and lower.
The problem of not being able to afford a home because you have no job, or a lesser income created by a down economy will last at least 6 months, and then take 6 months to a year to get back to where it is now.
Banks are in trouble and hessitant to loan anything less than very good credit and 20% down. Many savers lost a lot of their down payment in the stock market so there are problems there as well.
Finally, there's history. Past down swings have taken years to turn around.
What does "confidence" have to do with all this?