I think the housing market is midway through its severe bear market, if not more. Residential real estate will bottom in price either this year or, more likely, in the first half of 2009. The number of housing starts has collapsed, and inventory is at multi-decade highs, which are both prerequisites for a bottom.
However, housing is an illiquid, discrete market, unlike the stock market, which is liquid and continuous. Thus, the bottom may take longer in housing simply because it takes longer for sellers to adjust their expectations downward.
But housing prices are set to slide considerably further, as anyone with two eyes and a modicum of objectivity should see. Banks and mortgage lenders are raising their lending standards. That means credit will remain tight, boxing out many potential buyers. Interest rates on many mortgages are about to reset, ratcheting up the pain on many borrowers and triggering more defaults. Home inventory is still growing and must be worked off before the market gains some kind of equilibrium.
And now a new study by one former and two current Federal Reserve economists gives us another major reason to be pessimistic about home prices: the price-to-rent ratio.
Most human beings are rational animals. If home prices get too high, many will choose to rent. If rents get too high, many will choose to buy. Economists feel the price-to-rent ratio is perhaps the most accurate gauge of fair home value.
Banks are just beginning to liquidate their inventories of foreclosed homes. As foreclosures pile up, banks will sell properties below par, in some cases substantially, to jettison properties off the books.
Forced sales are beginning to occur, with Lennar (LEN) selling several thousand units well below book value. In my opinion I think we're going to see Forced selling accelerate, and the market will not bottom until it peaks.
However, for people who need a home to live in, have a stable job...I agree it's a great time to purchase a home. The tightening of lending standards is already occurring, as a result of the banks issues with solvency.
Have a great night-PR
Comments(3)