We’ve been here before. Just a couple years ago it seemed the housing market was stalling out. The response was a coordinated effort from Washington D.C. to prop up the market. Congress offered a tax credit for qualified homebuyers and the Federal Reserve invented creative measures to artificially reduce mortgage loan rates. Though advertised differently, in reality both measures were a terribly expensive attempt to rescue a banking industry drowning in bad loans.
Less than a year after the housing tax credit expired, prices are falling again. Even the always optimistic National Board of Realtors acknowledges that. There are additional concerns on the horizon though that threaten market stability and deserve your attention.
Artificially Low Interest Rates
The Federal Reserve has announced that they plan to stop buying U.S. government bonds. In the absence of other buyers willing to lend money to the world’s largest debtor nation at historically low interest rates, one could reasonably expect interest rates to rise. Mortgage rates would follow suit. Higher mortgage rates equate to higher payments and presumably lower home prices.
Expiration of the Tax Credit
The Federal tax credit has come and gone, but an important component is often forgotten. A buyer who purchased a $200,000 house and qualified for the first-time homebuyer credit really only paid $192,000. The Feds threw in the other $8,000 to keep the reported sale price at $200,000. It isn’t necessarily reasonable to assume that the same home is now worth $200,000 as that represents a 4% increase. The unfortunate reality is that it may be difficult to find a buyer willing to purchase the home for more than the previous purchase price of $192,000.
Unsold Inventory and the Foreclosure Moratorium
Put simply, there are more homes for sale than there are interested and qualified buyers. Though each market is different, when supply dwarfs demand the result is the same. To make matters worse, U.S. banks are currently sitting on thousands of delinquent home loans. They are unable to proceed with current foreclosures until they work out a deal with the Feds regarding hastily processed foreclosures during the last downturn. The expectation is that they will have to cough up some money for improper practices but then they have the green light to proceed with the massive backlog that grows daily.
Stubbornly High Unemployment
Unemployment and underemployment are both tough to calculate, but it’s fair to say more people would like full-time jobs. With unemployment still high despite all of the recent stimulus measures, more homebuyers have fallen behind on their payments. An uncertain labor market keeps other would be homebuyers on the sidelines.
Economists don’t seem concerned by the likelihood of pricing decreases of the same magnitude of the last cycle. Perhaps they are correct as tell tale symptoms of a bubble in housing prices seem to have faded. In an environment where too many homeowners are still underwater or have a low percentage of equity though, I’d argue that even a minor decrease in prices (5-10%) would have a substantial impact.
At the very least a decline in housing prices will be frustrating for many. For some it will tip them into foreclosure or encourage them to walk away. For others insufficient home equity will put planned moves on hold and force savings to be directed to their outstanding loan balance. A decline is likely to further pressure local school districts whose budgets are based on inflated property tax revenues. This creates a seemingly perpetual cycle as fiscally restrained school districts are quickly viewed as less desirable and thus home prices are pressured further.
The prudent homebuyer is again reminded to buy well within his or her means, anticipating the future headwinds outlined above. The prudent investor keeps a close eye on the situation, recognizing important implications for their investments if weakness in the U.S. housing market persists.