Forget Looking for a Housing Bottom

While the pundits and economists have begun making projections on when we’ll begin to see home prices increasing, we can forget looking for a housing bottom. Macro projections may make for interesting headlines, but what homeowners want to know is when the price of THEIR home will increase; and the answer to their question could be: NEVER.

 

Much of the past year’s home price fluctuations resulted from the Housing Tax Credits and the nation’s widely varying unemployment rate. Once the Tax Credit expired, prices in most areas returned to their downward trend. However, some areas of the country—the area surrounding Washington, DC, portions of California and Texas, some areas of New England, and others, have seen rising home prices, but those areas also have a correspondingly higher rate of employment, a key factor to housing demand.

 

What I think we’ll see in the future is a continuation of this trend with home prices rising in those areas where job creations are strong, and prices unstable or falling in those areas where jobs are unlikely to return. Homeowners in areas of high unemployment are “out of luck” if they expect the price of their home to return to the levels of 2004-2006. Some of the cities that experienced extreme job losses have recently seen nice homes in good areas selling for $25 per square foot. It is irrational to expect those homes to recover their lost equity; and predicting a bottom for their market futile, for some have passed the point of recovery. Stabilization may be the most optimistic outcome. An interesting article on Yahoo describes some of the areas where home prices are well below construction costs.

 

The U.S. economy is being re-formed, the jobs picture is changing, and housing must follow. While we’re experiencing a tepid recovery, with the stock market following a slow rise, and with some businesses having returned to profitability, and with some jobs being created, we’re far short of a typical recovery. During the coming decade I expect to see a growing group unable to participate in home ownership; and it is that group which helped to fund the growth of the past decade. Without their participation, the national housing numbers will remain wanting.

It is difficult to image a return to overall stability unless we can somehow magically create millions of new jobs—a most unlikely scenario. While the Fed is now poised to inject more than a half-trillion dollars (QE2) in an effort to boost the economy and make housing more affordable, the influx of dollars seems unlikely to have a significant impact on either mortgage rates or housing. And with today’s historically low rates failing to lure additional buyers, a slight lowering of mortgage rates will probably bring out few buyers.

 

The objective of QE2 seems unclear; if it is to entice more homeowners to refinance, what is the purpose? If it is only to allow homeowners to lower their monthly payment, there is no benefit to the economy. But if Bernanke expects homeowners to go on another spending binge because of their “found” money, I suspect he’ll be surprised. Not only is such spending one of the reasons for our current problems, those homeowners who have survived the housing crisis and who have some remaining equity have seen the consequences of reckless spending. I doubt many will revert to using their home as an ATM.

 

There’s just no sign on the horizon that housing will stabilize or that home prices will return to robust appreciation, so we can forget looking for a housing bottom. What I expect is a housing market that will seem normal in some areas, unstable in others, and extremely depressed in a few.

 

Few outside the Beltway have confidence that Bernanke’s efforts will bring either growth or stability to the economy. His track record is dismal at best. Most recall his pronouncement at the beginning of the subprime crisis that it would be extremely unlikely for home prices to fall on a grand scale. And just over a year ago he said, “The Federal Reserve will not monetize the debt.” However, in direct conflict with that statement, Dallas Fed President Fisher recently said, “For the next eight months, the nation’s central bank will be monetizing the federal debt.” If Bernanke actions and rhetoric are meant to instill confidence, they fall woefully short. Most are now jaded to such ramblings from bureaucrats and politicians who seem reluctant to share the truth—if they are even aware of it.

Once again the government’s efforts will disappoint; and once again they may be setting the stage for some painful “unintended consequences.” The best hope for this latest round of economic waggery is that it will “do no harm,” stabilizing the housing market seems out of the question.

 

For additional blogs on this topic, see:

While Housing News Is Interesting, Understanding YOUR Market Is Essential

No Housing Recovery = No Recovery

Home Prices Must Fall

Fundamental Changes Coming To The Housing Market

 

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