A new housing bubble forming won't deliver high double digit appreciation, a fast moving housing market or even much housing inflation, according to the latest analysis by Housing Predictor. Instead, it will deliver a slow-paced kind of gravity prone real estate market that will bewilder investors and average home buyers.
After more than a decade of rising home prices in many of the most populated areas of the country, and fall out from the financial crisis housing inflation is projected to develop in time, but at a snails pace. Housing prices haven't suffered a shock like they have in the U.S. since before World War II.
The Federal Reserve Board of Governors is keeping interest rates at or around zero percent in an effort to get home buyers back into the market. The Fed is also buying up mortgage paper, but their buying binge is scheduled to soon end as the government attempts to do everything it can to stabilize real estate markets.
The new housing bubble forming will be driven by the Fed's aim to keep the economy in check, boost the economic recovery and re-stabilize the housing market. Little effort has been made to help real estate investors and speculators caught in the foreclosure epidemic. A new round of investors, speculators and primary home buyers will dominate the marketplace to scoop up foreclosures. This bubble is projected to be more of a large volume of home buying than anything else.
Over the long haul investors should be rewarded, but the days of fast flips to make tens of thousands of dollars are for the most part history. Bankers have slashed prices on foreclosures to get the inventory off the market in the worst foreclosure epidemic since at least the Great Depression. In real terms, the volume of foreclosures has already exceeded the Great Depression and is forecast to rise over the next several years.
The Fed is carefully monitoring the economy amid speculation that interest rates could be raised sometime in 2010, but clearly will not raise rates until the economy demonstrates more strengthening. The extension and expansion of the first time home buyers tax credit should also aid markets in healing over time.
The record volume of foreclosures will provide a huge inventory for bargain hungry buyers and investors' eager to get a great deal as the mortgage supply offered by bankers loosens. The government has little choice other than to buy up more mortgages to aid the recovery.
However, home values in the majority of the country will decline further if policymakers in Washington, D.C. don't take major steps to force bankers to work with homeowners at risk of foreclosure. Just about all foreclosures are now due to homeowners being upside down or owing more on their homes than they are worth, adjustable rate mortgages that went hay-wire and speculators who didn't ever see the possibility of property prices crashing.
So far Congressional leaders in Washington have provided only talk to force bankers to work with homeowners at risk. Action is what counts. Government leaders are going to have to take serious action to at least curtail the epidemic of foreclosures to aid the recovery.
There is little wonder why Congress has been slow to respond. Lobbyists in the banking industry and other real estate interests made donations amounting to $354-million dollars to Congressional campaigns at the height of the real estate boom. (See Money Trail of Housing Bust Leads to Congress.)
Otherwise, the new housing bubble forming that could help to stabilize markets and even trigger a small level of housing inflation to start an earnest housing recovery will be another mere temporary reprieve. As we've all learned, financial shocks to the system often come at a high price.
Published November 8, 2009
