The housing market recovery is likely to take a decade or more before strong home appreciation is evident in the majority of the country, according to the latest analysis by Housing Predictor. The credit crisis triggered by the foreclosure epidemic will be followed by a deflationary cycle in commercial real estate compounding the turmoil in the national economy.
There are reasons for homeowners to be discouraged about their home values sinking. But most will hold on to their homes through the downturn. For those more mobile, it could be difficult to sell a house in this economic environment without losing money. But things will get better. Real estate has always been a long term sort of investment with major booms and busts. The busts are becoming more exaggerated with creative mortgages offered by banks prompted by unregulated Wall Street securities.
However, it’s not all disappointing news. Home prices have dropped in the majority of the country allowing many to become new homeowners. The lower prices have transformed markets so that many have become havens for buying real estate at bargain prices. Many markets have seen home values drop as much as 40 to 60% from the markets peak.
Housing appreciation with higher prices should show improvement as early as sometime in 2011 in many areas of the counrty. While appreciation won’t be as strong as during the boom, home values should show increasing strength with the stabilization of markets.
The stabilization of the real estate market is key to improving home sales, and aiding the national economy in recovering. A clear decisive plan to do that will have to be implemented by Congress and the new White House administration before the overall economy improves and it will have to include halting the epidemic of foreclosures. The root of the economic crisis is the real estate market, which is suffering through the worst economic depression since the Great Depression. Home prices deflated as much as 30 to 35% in the depression. Foreclosures are at all-time highs and are now averaging between 150,000 and 200,000 units a month.
The longer Congress and the White House take to come up with a direct plan to deal with the epidemic of foreclosures, the longer it will take the economy to improve. Each foreclosure damages the economy an average of $225,000, equal to the average mortgage. Banks and other lending institutions that made the loans are being bailed out by the government with multi-billion dollar infusions. However, many will eventually fail and would have already failed as insolvent without government aid.
It’s clear that every foreclosure magnifies the economic crisis. The system used to gauge the percentage of homes and other properties likely to be foreclosed by lenders has proven to be useless.
After the Savings and Loan Crisis in the late 1980’s it took about a decade for real estate to stabilize before inflating in value aided by low interest rates. Many blame the Fed for keeping mortgage rates low for too long. The economic crisis has a long list of participants to blame. Key players include overly aggressive lenders, the acts of unethical mortgage brokers, dubious appraisals and most prominently greed on behalf of bankers and borrowers.
The high concentration of criminal activities in the marketplace may never be fully known, despite the arrests and prosecutions of hundreds of mortgage brokers, lenders and others committing fraud. As a result, the crisis will take years to unwind as housing prices and other real estate values decline. It is likely it will take longer than the S&L Crisis for market conditions to fully improve.
Nearly every real estate depression has been grounded in excessive land prices. Although foreclosures of land are increasing nationally, they haven’t yet reached the epidemic levels of home foreclosures. But in the next year they are expected to increase to epidemic proportions as land values fall more rapidly.
There have been warnings for years. The decline in housing prices stands to create future dislocations with growing unemployment and business failures that will develop an entirely new sort of regulated economy from Wall Street to Main Street.