Recently reports on the housing crisis seemed to have fallen off the press. We are not hearing much about it. Home prices have gone down from their heights, way down in some cities. Toxic mortgages have largely been written off by the banks. Banks that took the bailout money to turn their portfolio around have repaid a large amount of that.
Time to move on, is it? There is not question that the U.S. housing bubble had burst. Following that burst, the prices of homes are likely not to fall as precipitously as before. We have seen historic housing prices to rise in the long-term, and remain confident that in the long-run all things will be well.
Yes there is some chance of that, but this is not at all for certain for two reasons: Firstly, the housing market is greatly dependent on employment. Secondly, the fundamentals of U.S. economy may have changed.
While housing prices have stopped falling precipitously, it is possible that prices will continue to fall, if the employment market does not pick up. Persistently high employment rate keeps the public from having enough capital to invest in the real estate market, it keeps the bank from supplying mortgages, even if in general the banks look to expand the availability of credit. It has to do with supply and demand. Demand softens when individuals can not prove sustainable income to fund a mortgage, to get a mortgage approval, supply of housing will increase when individuals who lose their jobs find it overtime unable to continue financing their existing homes. People who might have relied on the equity on their homes to get through the crisis might find their equity shrinking and that eventually they no longer have a personal stake in them. Simple supply and demand dictate that if unemployment remain high, housing markets are simply unlikely to pick up.
At the same time, what historical economic data we have relied on to make analysis may not hold true anymore to an economy that we are facing in the near or far future. Instead of a creditor economy, the U.S. has become a debtor economy. Monetary policy no longer relies solely by the Central Bank, but must be diplomatically negotiated with our creditors. Growing competitiveness of the economies in the rest of the world translates into thinner margins for U.S. producers, shrinking profitability which we rely on to pay back the debt. These factors all affect interest rate movements, and thus directly the housing market.
Though the Central Bank at the moment may be able to keep the interest rates at historic low, our creditors may start losing the confidence of the U.S.’s ability to pay back the debt, if it continues spiraling upwards, and force the U.S. government to pay high interest rates on the debts, translating to high interest rates that the Fed can not control. Whether the Fed likes it or not, it would then not be able to safeguard the U.S. housing market by keeping the rates low during a soft labor market.
What would the government, the Fed, politicians, economists say or do in the next step? It is a sensitive and critical juncture still, the crisis may not be over yet.
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{ 3 comments… read them below or add one }
Responding to Erik. Happy to hear that the housing market by you has stablized for the moment. I think though that the view of this article was more macro in nature and it was speaking of the national level. It is not also speaking at the very short run or even the present time. Let’s see in six months to a year what happens. I stand by the correlation between employment level and housing prices at this time.
Just tossing this out there…. seems relevant…
http://www.bloomberg.com/apps/news?pid=20601087&sid=a2Z5GnTAPcuo
Very interesting points indeed.
I am an appraiser by trade. In April of this year, we were required to include a new form (1004MC) in every report which is supposed to give the Lender a clearer idea of market trends. From the end of 2005 to the beginning of 2009, most markets in this area where in decline, though the velocity slowed in 2008. By 2nd quarter 2009, the decline in most markets in my area appear to have come to a halt. So there is at least some good news in that most homeowners are no longer losing equity. I also know a gentleman who is involved in mortgage modifications and deals with Obama’s plan where the homeowner is allowed to pay 31% of their income while getting back on their feet in order to try to avoid foreclosure. However, according to the attorneys he speaks to on a regular basis, there is only about a 5% approval rate for a bonified modification. Since the program is approximately one year old, the future is uncertain for homeowners who are months (or years) behind on their payments. Logic would tell you that the banks may be better off by simply deferring these payments to the end, as opposed to taking their chances at auction. We all know, however, that there is very little logic when it comes to a bank.
In summary, since it is the Central Bank (Federal Reserve) who has their hand on the joystick, the market will never truly regulate itself until the Federal Reserve is abolished and we return to the gold standard. Of course, I’m not holding my breath.