Yahoo! Finance has posted an excellent article (from Businessweek) discussing the reasons why home prices could drop 25% or more before the housing market finally hits bottom.
Some experts have begun to suggest that a bottom is in sight. Pali Research analyst Stephen East wrote in a research note to his firm’s clients on Jan. 25 that “the sun is not shining very brightly, but at least the worst of the storm has likely passed.”
Uh.. yeah! I’ll have what he’s drinking.
Why might housing prices plunge violently from here? Remember the two powerful forces that pushed them up: lax lending standards and the conviction that housing is a fail-safe investment. Now both are working in reverse, depressing demand for housing faster than homebuilders can rein in supply. By reinstituting safeguards such as down payments and proof of income, lenders have disqualified thousands of potential buyers. And many people who do qualify have lost the desire to buy. “A down market is getting baked into expectations,” says Chris Flanagan, head of research in JPMorgan Chase’s (JPM) asset-backed securities group. “People say: I’m not buying until prices are lower.’” He predicts prices will fall about 25%, bottoming in 2010.
If you’ve been reading this or any other real estate blog, then this isn’t news to you. It’s just a sign that the mainstream market is starting to recognize that the party has ended. Millions of people are just starting to wake up from a wild night with a massive hangover.
Cheaper mortgages won’t necessarily ride to the rescue, either. Thirty-year conventional fixed-rate mortgages failed to fall after the Fed’s two January rate cuts, averaging 5.5% on Jan. 30. Financing remains cut off for subprime borrowers (BusinessWeek, 12/11/07) and for owners whose home equity has dipped too low to qualify for a new loan. Fed rate cuts will ease, but not eliminate, the pain from resets on adjustable-rate loans.
Banks are trying to cover themselves and are pricing new risk accordingly. The Fed rate cut seems more like a move to help banks and businesses. Consumers (homedebtors) aren’t seeing much relief.
Observers with a Calvinist streak see a housing crash as not only necessary but also positive. It will force Americans to live within their means, which will enable the U.S. to work off some of its towering debt, says Peter D. Schiff, president of Darien (Conn.) brokerage Euro Pacific Capital, who was early in predicting the crash.
There is some truth that Americans need to live within their means to avoid problems like this, however what will it take to cause that change? As we live now we’re too used to a life of excess, using credit to buy everything and even pay utility or grocery bills. How bad of a recession do we need to get into before people wake up and realize that the lifestyle we’ve fallen in love with cannot be sustained?
The bigger the boom, the harder the fall.
Read the full article as it summarizes just about every reason for the housing market to fall. When will a recovery be in sight?
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