Housing Recession - Double Dip?

residential bottom crashThere are many people who feel that the residential dip has just about bottomed (or is now beginning to get better). However, there are several things that could cause for yet an even further dip in the housing market next year. The substantial drop in the residential market was one of the big factors that initially led us into this recession. For most people, their home is by far their largest investment and when the value of that investment almost gets cut in half in nearly 2 years, it has large psychological effects. In fact, I believe the recent uptick in consumer confidence had a lot to do with the little growth we've seen in home sales. However, here are a few reasons why we may not be out of the woods yet.

Tax Incentive Ending
There is no doubt that the $8,000 government tax credit for first time buyers has pushed people who would have ordinarily waited to buy in a year or so into buying now. A majority of the houses being sold involve buyers taking advantage of the credit. Incentives like these usually call for an "advance demand" in the product. As we saw in Cash for Clunkers, auto sales spiked during the months of the program. However, the following months after the program was discontinued produced record low sales, thus squeezing 3 months of demand into one. As of now, the tax incentive program has been extended into March, but the government has made it clear they will be looking to get out of the business of bailouts in 2010. We can expect a rather aggressive drop in demand if and when this program is discontinued and analysts are expecting the drop.

Increasing Loan Difficulty
One very big factor of why houses are continuing to sell is that many can still get a conforming loan. The government has been aggressively buying Freddie and Fannie conforming loans, which has helped banks to issue them. That coupled with the 0% interest rates has helped interest rates stay aggressively low. However, just as it is the case with the tax incentives, the government also is looking to significantly lower its amount of loan purchasing that it has been doing, forcing banks to begin taking on the risk by themselves. As we have seen with the commercial sector, those type of loans are almost non existent at this point and the terms are not favorable for the borrower. As interest rates begin to climb up and loans become harder to come by, be sure that we will see yet another dent in demand.

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It is clear that job losses continue to mount up. Sure, the rate of decline is slowing, however, we can expect to see continued job losses well into 2010. As a result, discretionary income will continue to diminish in the overall economy. Increasing energy prices only makes this worse. Unless consumer sentiment can dramatically shift next year, we will most likely see most consumers wait "on the sidelines" until greener pastures grow closer. Without the incentives, it does not give consumer much of a reason to buy.

Built Up Supply
Sure, recently we have seen a bit of an uptick in home sales. However, this does not make up for the massive inventory that awaits the chopping block in the coming years. Just in foreclosed homes alone, the current inventory would well last us for 3-4 years. Due to moratoriums and government holds on foreclosures, the delinquent homes have only been building up more and more. Also, banks have been "staffing up" to prepare in the disposition of the millions of homes that are in the pipeline. Eventually, these homes will be foreclosed on and be put to market. When they are sold, banks will price them to sell, whatever that price may be. With the amount of supply which could be on the market at once, we could see a rather dramatic drop in price once more.

Much of these reasons will depend on how the government chooses to manage these problems and if they continue to try and combat them. As for now, they have created a false supply and demand curve by limiting the supply (through moratoriums and government regulated loan modification) and artificially creating the demand (through stimulus and incentives). If they at some point decide to discontinue this and let nature take its course, we could see some very adverse effects. This in turn would effect the entire economy. Happy Trading.



    Housing will make a comeback.

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