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November 18th, 2009 by John Burns
While both the media and stock investors believe that housing has bottomed, they are unaware of the massive supply of homes that are already in the foreclosure process that will certainly drive home prices down even further when they are sold. We have been projecting a “W” shaped recovery for some time, and we are becoming even more convinced that we are right. The shape of the second leg down is almost completely dependent on the level of government intervention that will take place.
For a number of reasons, banks have not been aggressively taking title to homes and selling them, which has resulted in very few distressed sales in comparison to the actual level of distress in the market. This delay in REO sales, along with historically low mortgage rates and an $8,000 tax credit, has helped to stabilize the housing market – temporarily.
It is very clear that price stabilization is temporary unless something is done. Here are some facts to help project what housing will be like in 2010:
2009 Government Intervention
Government intervention to date has been helpful in preventing an even more dramatic decline in home prices. As shown in the chart above, housing demand has only fallen to “normal” levels and stabilized there. Without historically low mortgage rates, support for Freddie Mac, Fannie Mae and FHA, and an $8,000 tax credit, how far would sales have fallen this year and what would that decline in demand have done to pricing?
Demand needs to continue to be stimulated to bring down supply, particularly while the country continues to lose jobs. Without continued government intervention, home prices will plummet, banks and the GSEs will continue to lose money, and the economy has virtually no chance of increasing overall employment in 2010.
What are your thoughts?
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