So, does that mean a bottom is in?
From Bloomberg’s opinion columnist, Caroline Baum, to The Big Picture’s Barry Ritholtz to Bloomberg reporters John Gittelsohn and Kathleen M. Howley, it seems that the idea of the inevitability of declining home prices is gaining traction. From Gittelsohn and Howley at Bloomberg:
The slide in U.S. home prices may have another three years to go as sellers add as many as 12 million more properties to the market.
Shadow inventory — the supply of homes in default or foreclosure that may be offered for sale — is preventing prices from bottoming after a 28 percent plunge from 2006, according to analysts from Moody’s Analytics Inc., Fannie Mae, Morgan Stanley and Barclays Plc. Those properties are in addition to houses that are vacant or that may soon be put on the market by owners.
Caroline Baum, also of Bloomberg, observes that the prescription for a housing boom fueled by too much money is probably different than adding even more fuel in the form of even cheaper money:
Whether it’s ultra-low interest rates, borrowing and spending (too much then, too little now), or artificially inflated home prices, the cure bears an uncanny resemblance to the cause.
I’ve identified five areas where policy makers need to reexamine their recommendations or do a better job of explaining why yesterday’s mistakes will be tomorrow’s remedies.
And Ritholtz of The Big Picture blog states the obvious, proclaiming that excess inventory must be cleared out for housing to recover.
So, will housing prices be allowed to find a level where supply and demand equilibrate? It’s hard to say, because as I’ve discussed before, Fannie Mae and Freddie Mac, and really any financial institution with residential real estate on their balance sheets, stands to lose a great deal more if housing prices really do find a level consistent with market metrics. The government is apt to step in to rescue things again, just as they did before, because the government doesn’t care what you pay for your house, so long as it’s equal to or more than what someone else previously paid for it. Elsewise, the government itself will have a balance sheet problem, as it inevitably tries to rescue again the financial system.
Such a conundrum. Let prices fall now and rescue banks later, or artificially prop up prices now and hope beyond hope that some future taxpayer will be able to afford the bill. My guess is they’ll settle on the latter strategy, if for no other reason than that the raison d’être of the US government has become pain avoidance by dint of pain delay.
It will be interesting to see how this plays out.