There is a strong case that the US housing market will collapse, and go down with a double dip recession. I have rarely believe negative economics forecasts. I think they are often exaggerated to get headlines because negative news sells more. However, consider these very real economic factors which could substantiate a negative US housing market prediction. I will give both the reasons for and against a second dip in the housing market. If you feel anything is missing please comment.
Case for a double dip in the US housing market
- Bush tax cuts will expire in 2011. Economists Arthur Laffer has argued increases in taxes in the middle of a troubled economy will be enough to push the economy down further into a real crisis.
- Obama fiscal stimulus money and breaks for home buyers (8,000 dollar credit), cash for clunkers etc is running out. Demand is exhausted and anyone who possibly could buy did. There is no more pent up demand. People are more in survival mode then spending mode, more concerned about shoring up finances and preparing for retirement than purchasing a new home.
- Monetary policy, that is the lowing of interest rates is ineffective. The Federal reserve has lowered rates so far that nothing is helping now, if anything we are moving towards deflation. They are pushing against the wind. This real estate bubble was caused by reckless credit. Everyone got credit. Me personally I am almost waiting until I have a lot in cash to buy a home.
- The strong dollar will decrease exports and decrease interest for foreign investment in US real estate. Also with a strong dollar real estate investors will move money abroad to take advantage of the currency.
- Unemployment is still very high and it will take many years for this to drift back to normal levels.
- The US Federal government absorbed toxic real estate assets but still no solution in the long-term or replacement for Freddie Mac and Fannie Mae.
Positive economic factors in the US housing market
- In the last 80 years since the Great Depression there has been no real prolonged contraction or double dip in the real estate market. Market prices have taken time to adjust, up to ten years, but no double collapse.
- Market reversals come when people least expect it and say there is no hope. Prices in the US market have come down and even a small sign of improvement could bring a lot of cash on the sidelines to the market.
One prediction of the US housing market
The market might not recover for ten or fifteen years. However, above is one scenario where the trend will continue until prices are bought back in line with supply and demand. Right now people who wanted to buy have bought one with the Obama credit. Now the people in the market are junk dealers looking for cheap bargains at the scrap heap. Most families are worried about their jobs and people tell me they are pretty stressed out. They will not be making large purchases. Besides that the velocity of transactions are very light and there is nothing holding prices up to their current levels except a downward resistance on the part of the sellers.
Therefore, we can conclude the US housing market is still in disequilibrium. Markets are all about equilibrium. I think it would be very hard to make a case for positive prediction in the US housing market when the current market suggests disequilibrium as supported by the factors listed above.