Is Mark Zandi Right About House Prices?
Mark Zandi, chief economist with Moody's analytics, says home prices will fall through next year. He says that will put the total decline at around 34% for a national average.
For Zandi, things will start looking up then. He figures that with low interest rates (which he's assuming stay low), and banks writing mortgages (because the bankrupt Fannie and Freddie keep buying up mortgages from the banks after they write them - all subsidized by the taxpayer), and people getting jobs so that they'll be looking to buy a house, and homes being priced about where they were before the real estate bubble started, and the houses being pretty much at fair value then...well, things will be turning around nicely.
The thing is, that's a lot of assumptions.
Right off the bat with interest rates, you've got to think that somehow, some way rates will start going up some day. On the other hand, the Fed's really not interested in raising rates as long as the economy stays weak (which it has been, is and - so far - looks like it will continue to be). So maybe interest rates will be low in year or so.
As for banks writing mortgages, the ones writing now are doing it because they can sell to Fannie and Freddie - and why won't that racket keep going for the foreseeable future? No one's making that big a stink about the billions we taxpayers are pouring into these zombie entities - unless, of course, you factor in recent victorious "tea party" congressman who've sworn to cut out all the billions in bail outs. But who knows if they'll really do anything. Let's wait and see.
Of course, no bank's going to give a mortgage to someone unemployed, even with Fannie and Freddie. But Zandi figures employment's ready to rumble because companies profit margins, are all spiffy these days, meaning business must be picking up, so soon they'll be be looking to hire. That is, unless profits look good because the companies have cut back on expenses -and employees so much. But, if Zandi's right, then of course all those newly employed folks may be in the market for a house - assuming the jobs they get pay a good salary.
As for houses being priced fairly, something like where they were before the bubble in real estate started blowing up, that could happen. Over time, if prices don't go down that much more, they'll kind of settle in. And if people buy based on the monthly mortgage payment, rather than the price of the house, and interest rates do stay low, then, with a new job paying a good salary, and a house priced at what people tell you is a "fair" price, you might figure you're getting a pretty good deal.
But if Zandi's right about prices being "fair" in a year or so, there's one little problem. Historically, when prices go up so high because some market - like houses - is in a bubble, they usually don't decline to "fair" value. They usually shoot right past that fair value and go down to something below fair value. And it's not uncommon for prices to sink significantly below fair value before they stabilize and start going up again.
The other thing they might do is stagnate. And if that happens, chances are they'll stagnate for years.
Of course, it could be different this time. But saying it could be different this time is usually a dangerous thing to say.
So maybe Zandi's got too many iffy items in his happy real estate scenario. I don't know. But we'll find out in about a year or so, won't we?
For Zandi, things will start looking up then. He figures that with low interest rates (which he's assuming stay low), and banks writing mortgages (because the bankrupt Fannie and Freddie keep buying up mortgages from the banks after they write them - all subsidized by the taxpayer), and people getting jobs so that they'll be looking to buy a house, and homes being priced about where they were before the real estate bubble started, and the houses being pretty much at fair value then...well, things will be turning around nicely.
The thing is, that's a lot of assumptions.
Right off the bat with interest rates, you've got to think that somehow, some way rates will start going up some day. On the other hand, the Fed's really not interested in raising rates as long as the economy stays weak (which it has been, is and - so far - looks like it will continue to be). So maybe interest rates will be low in year or so.
As for banks writing mortgages, the ones writing now are doing it because they can sell to Fannie and Freddie - and why won't that racket keep going for the foreseeable future? No one's making that big a stink about the billions we taxpayers are pouring into these zombie entities - unless, of course, you factor in recent victorious "tea party" congressman who've sworn to cut out all the billions in bail outs. But who knows if they'll really do anything. Let's wait and see.
Of course, no bank's going to give a mortgage to someone unemployed, even with Fannie and Freddie. But Zandi figures employment's ready to rumble because companies profit margins, are all spiffy these days, meaning business must be picking up, so soon they'll be be looking to hire. That is, unless profits look good because the companies have cut back on expenses -and employees so much. But, if Zandi's right, then of course all those newly employed folks may be in the market for a house - assuming the jobs they get pay a good salary.
As for houses being priced fairly, something like where they were before the bubble in real estate started blowing up, that could happen. Over time, if prices don't go down that much more, they'll kind of settle in. And if people buy based on the monthly mortgage payment, rather than the price of the house, and interest rates do stay low, then, with a new job paying a good salary, and a house priced at what people tell you is a "fair" price, you might figure you're getting a pretty good deal.
But if Zandi's right about prices being "fair" in a year or so, there's one little problem. Historically, when prices go up so high because some market - like houses - is in a bubble, they usually don't decline to "fair" value. They usually shoot right past that fair value and go down to something below fair value. And it's not uncommon for prices to sink significantly below fair value before they stabilize and start going up again.
The other thing they might do is stagnate. And if that happens, chances are they'll stagnate for years.
Of course, it could be different this time. But saying it could be different this time is usually a dangerous thing to say.
So maybe Zandi's got too many iffy items in his happy real estate scenario. I don't know. But we'll find out in about a year or so, won't we?
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