The Future of the Housing Market

The subprime mortgage crisis has extended itself throughout the economy. According the Congress' Joint Economic Committee, some 3.7 million homes will probably foreclose as a result of the crisis. As of August, according to their figures, 1.7 million of those homes have already foreclosed, and another 2 million are expected during the next two years. Some of the largest names in the financial industry are now subject to multiple lawsuits and are writing off tens of billions of dollars as lost.

What is most fascinating about the subprime crisis' effect on the housing market, however, is the economic geography of the market dynamics. Because so many of the houses that were mortgaged with subprime loans are in the same neighborhoods of various towns and cities across the country, the effect of the crisis has not been spread equally across the nation's cities and towns. Instead, it has left some cities, like New York City, largely untouched, but literally created new ghettos of neighborhoods in the cities hit hardest by the crisis, such as Cleveland, Ohio.

The short term future of the housing market looks grim. The Fed chief testified to Congress on Nov. 8th, noting that the housing market will suffer the worst of the consequences of the housing crisis from now until the end of 2008. During that time, 450,000 subprime mortgages will reset at higher interest rates each quarter. As the Chairman of the Federal Reserve, Professor Bernanke – who used to head the Economics department at Princeton – put it, “Delinquencies on these mortgages are likely to rise further in coming quarters as a sizable number of recent-vintage subprime loans experience their first interest rate resets... A sharp increase in foreclosed properties for sale could also weaken the already struggling housing market and thus, potentially, the broader economy.”

While some analysts are expecting the low mortgage rates – current 30-year rates fell to just 6.24% this week – to help the housing market rebound in the middle of 2008, that is treated by many, including the generally optimistic Federal Reserve Board, as wishful thinking. It is, after all, hard to an envision a scenario wherein the national real estate market will recover while in the middle of the worst of the subprime crisis.

A more likely scenario will probably play itself out in the last quarter of 2009, when improved consumer sentiment and several additional rate cuts by the federal reserve will have served to increase demand in the housing market sufficiently to turn a nascent rebound into a steady increase in the value of the nation's housing.