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Where is the housing market going now and
over the next few year? It is a complex equation.
Let's take a look at the major factors. Third in  
series.

I believe that the economy will continue to slowly
improve over the next few years. This activity will have
a beneficial but slow effect on the housing market.
The housing market is in too deep a hole to rise back
to “normal” levels in a year or two. I believe the worst
of the current housing statistics are an anomaly. But I
do believe that market sales will remain slow and
prices will decline another 5% over the next two years.

Why? We have eight months of housing inventory that
must be significantly reduced before there will be any
price pressure in housing. Of course, I know that this
inventory is widely divergent by region. Florida is in
much, much worse shape than New York for example
– by this criteria and most others. But the high
inventory is common across most of the country. And
the general excess supply does affect the entire
country.

Another critical statistic: At the end of 2010, 23% of
homeowners with mortgages were “underwater”, that
is, they owed more on their mortgages than their
house were currently worth. This number feeds the
foreclosure numbers we’ve seen to a degree, as
these people may be most likely to not be able to pay
their mortgage. There are also significant amounts of
people who will ultimately refuse to pay for a
mortgage on a home that is worth much less, even if
they are able to pay. How many people are in this
situation? Roughly 10% of all US family units owe
more on their mortgage than their home is worth. The
math: 66% of family units are homeowners, and of
these homeowners, about 70% have mortgages.  And
of these about 23% are underwater. This produces
the 10% underwater figure. This phenomenon will be
a drag on housing market performance for years to
come.  

All areas are affected by lukewarm demand which has
several sources. The first is the general economy. 3%
GDP growth is not robust enough to drive significant
demand to meet or outstrip supply. Further evidence
is the unemployment rate. Nationally it is still 8.8%
(March 2011) which is very high by historical
standards. Not only has the demand of those
unemployed people been taken off the table, but most
workers will report feeling uncertainty in their
employment, having witnessed others laid off and
acquiring increased workloads. Their feelings of job
security at all time lows. Most people don’t buy new
homes when they are worried about their financial
future. At least enough don’t to keep the market at its
current lows or worse.

Even though the economy appears to be improving
marginally, one can’t discount the possibility that we
will return to a recession state in the near future. The
recent improvement is one of the few positive factors
the housing market has going for it. But one must
factor in the possibility of another recession, and
weigh this into the forecast accordingly.

Other factors: There are proposals being formulated
in Congress that could make it harder to get
mortgages, and that will almost certainly make it
costlier to get a mortgage.  I assume their intentions
are good, in that they are pursuing this to make
mortgage investments safer to avoid future financial
meltdowns. However, if some of these policies are
passed in their current form they will certainly lower
total housing demand and exacerbate current housing
market problem in the short and mid term. Sales and
Prices will go down.

Examples of the changes: Higher fees for FHA loans
depending on how low a down payment is put down.
The lower the down payment, the higher the initial fee
and ongoing mortgage insurance percent that would
be paid. Other proposals would eliminate the low
3.5% FHA down payment entirely, raising the
minimum down payment to say 10%.  Let’s not forget
that most current mortgages are insured by
government programs such as FHA.

Another potentially damaging proposal is to require
banks to retain 5% of the loans they originate that do
not meet certain more stringent underwriting
guidelines, such as higher down payments or higher
credit scores. Once again, any of these policies may
ultimately serve a higher social goal, but there is no
question that in the short run, higher costs and more
stringent loan qualifications will lower demand and
hurt housing sales and prices, relative to what they
otherwise would have been. So we need to factor this
negative force into our next few years forecast.   

Last but not least, we should assume that interest
rates will rise over the next few years. They have
already risen somewhat, having a slight negative
effect on the market over the last year. They are still
historically very low. Every indication is that they will
have to rise over the next few years. Inflation is
looming as the government prints money and runs the
largest deficits in history. At some point this should be
reflected in higher interest rates to reflect future
inflation.  This is one more negative factor for the
housing market. If housing has produced the worst
results in decades during a period of the lowest
interest rates, what will happen when rates rise
significantly?  

Most factors we’ve considered appear to be negative
at this time. Given this I believe that the market will
remain slow as prices decline another 5% over the
next two years. After that I think it will remain flat for a
year and possibly start to rise in very modest
increments in three years. In my opinion, there are
simply too many potential impediments to overcome
to believe anything else.      

Click here to go to
Housing Decline in 2011 - Part
One.


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_________________________________________
Housing Decline in 2011? Here we
Consider the Evidence and Predict what
the Future holds. The Conclusion.    
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Housing Decline in 2011? Where is the Housing
Market going in 2011 and Beyond? Part One.

Housing Decline in 2011? Part Two - Here is a look at
some of the key statistics.

Housing Decline in 2011? The Evidence. Predictions
and
Conclusion.    
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