The best hope for housing
With the 2012 election less than a year away, much of the focus has been on jobs and the economy. Going hand-in-hand with that topic is the housing market. It’s been said that economic recovery cannot begin until the housing market returns to growth; conversely, it could be argued that the housing market cannot recover until the general economy picks back up. Of the two statements, the latter more reflects reality.
An economic bubble is a state in which the current value of an asset group temporarily exceeds that which is sustainable based on fundamentals, or “fair value.” When the tech bubble burst in the early 2000s, the industry never “recovered” as much as it stabilized. Many companies that experienced a rapid increase then decline in values, such as Microsoft, ultimately survived or even thrived, but their market values never returned to peak levels because they were driven by short-term market hype.
What’s going to happen
The same situation will occur in the housing market. According to the Case-Shiller index, home values have just about returned to their long-term trend line, which represents the same pattern of stabilization seen after other bubble collapses. In some liquid markets such as stocks, it’s not uncommon to see prices fall below the trend line due to a rapid sell-off in the midst of market volatility. This is also possible in housing due to the weak employment situation and large supply of homes, foreclosed or otherwise, still waiting to be put on the market. Such a dip should not be too severe, however, since the housing market moves much more slowly, and once people notice prices have returned to historical averages, prospective buyers will be more likely to enter the market and pay the prevailing prices. Conversely, they’re not going to enter the market until they’re sure prices have reached the bottom.
What’s not going to happen
Many people wishing for recovery are hoping for a bounce back to the inflated values at which their homes were purchased, which will not happen. For this this to occur would represent a reinflation of the bubble, and another collapse would eventually follow. Prospective buyers still have to contend with stagnant wages and a tepid employment outlook, and rising home prices would only stifle purchasing activity, not promote it. Low interest rates won’t hurt, but like pushing on a string, they won’t have much effect if buyers are hesitant to pull the trigger on such a large investment.
What can be done
To speed recovery of housing, the employment situation must improve to spur demand, and until the tax, regulatory, and legal environment is made more competitive, this is unlikely since businesses large and small are choosing to wait out the uncertainty. The market must find its bottom if prices are to stabilize; attempts to delay or prevent this will only drag the process out. The shadow inventory of foreclosures and distressed properties needs to clear out, and while people hate to admit their investment went badly, they ultimately must accept the reality of lower prices.
A solution that doesn’t involve a bailout, short sale, or foreclosure
Bailouts are a divisive topic, and the government is unlikely to start reimbursing underwater purchasers due to the massive cost and controversy it would generate. Since the market is partially frozen due to the number of people unable to sell since they’re underwater, one option would be to institute a program in which the government provides a loan (at market rates) for the amount underwater. The homeowner can then use this money to repay the lender the full amount of the loan, sell the house, and continue to repay their contractually obligated amount. This would likely be the most cost neutral solution and would restore some liquidity into the market, and wouldn’t require foreclosure or approval for a short sale.
The collapse of the housing bubble means those who bought at the peak won’t see their investment break even until incomes can fundamentally catch up to support such prices, which is decades away. Stabilization of the market can only happen once employment improves, not the other way around, and any promises by politicians or realtors to achieve a return to peak values cannot be taken seriously.