Housing Market Headed Lower : Beware of Spin

Even if this article is a bit pessimistic, one can conclude that since it comes from a private enterprise it probably is more correct then what we get from the government.

Given then the housing market is probably headed downward for some time to come, the general public shouldn't be surprised, during this political summer, to hear government officals proclaim 'all is well'. All we have to do is believe.

No, This Is Not a Housing Recovery
Source: Anthony Randazzo, "No, This Is Not a Housing Recovery," Reason Magazine, March 23, 2012.

Many government officials claim that the country is nearing a gradual housing recovery, yet the facts do not support this claim. Concerns over future interest rates, a large cohort of phantom housing and troubling historical patterns suggest that housing prices are likely to continue to decline before a real recovery is realized, says Anthony Randazzo, director of economic research at the Reason Foundation.

First, mortgage rates have been artificially depressed by the Federal Reserve. Through several waves of quantitative easing, the Fed has pushed average rates to between 3 and 4 percent, but such pressures will eventually subside. When rates go back up, the cost of mortgages will rise and demand for housing will consequentially fall. This will add downward pressure on an already-fragile market.

Second, there is an enormous amount of phantom housing available, defined as houses that are in the process of being placed on the market but have not been put up for sale yet.
Those who argue that a housing recovery is on the horizon emphasize the fact that there are only 3 million homes on the market currently.

However, this ignores homes that are in serious delinquency, homes in the foreclosure process, and homes that banks have seized but not yet put on the market. When these homes (most of which will be put on the market in the near future) are included, the number of for-sale homes rises to 10 million.

Third, historical trends suggest the market will continue to worsen before it gets better. Many have emphasized that the downward spiral has finally hit the long-term trend line, and that this means a rebound is imminent, but previous bubbles have shown a different pattern. Housing bubble bursts in the past have almost always seen prices dip far below the long-term trend line, only to recover several years later.

The housing bubble that peaked in 1978 then burst crossed below the trend line in 1981, not to recover until 1986.

Similarly, the housing bubble that peaked in 1989 declined a bit faster and fell to the average trend line in 1991, failing to return to that level until 1998.

These three factors suggest that the housing market is much weaker than Americans are being led to believe, and is likely to get worse.