It was recently reported that sales of new homes dropped to a record low in May. This surprised some as it appeared that the housing market was showing signs of recovery in the spring of 2010. Though most analysts believe that this drop was caused by the expiration of a federal stimulus program designed to buoy housing prices. Nonetheless, the 32.7 percent drop was supposedly the biggest monthly decline since the government began tracking home sales in 1967.
However, some industry experts believe the numbers are just a fluke and that the industry is on its way to a recovery. I don’t think that the housing market is going to recover quite as quickly as some are optimistically hoping. In a piece I did for Associated Content, http://www.associatedcontent.com/article/2036337/when_will_housing_prices_go_back_up.html?cat=3, in August of 2009 I thought that the housing market might not see a recovery until late 2010, or even later.
Well, it now looks like “later” might be the likely scenario. Why? As generations of American have seen real estate as a safe investment, the lessons of the past couple years has been that the real estate market can suffer as much volatility as the stock market. This is because, in part, that the real estate market has become intertwined with the financial markets when mortgages were chopped up and sold to various bidders. Normally, mortgages were seen as a safe investment for a bank, they would collect a fair amount of money for loaning money for a home, and if the homeowner defaulted then they could claim a property which was expected to go up in value.
Now because of an excessive number of home loans made over the past decade, home values are unstable, and thus lending out mortgages, a traditional bread and butter activity of banks, is now being reassessed. For one thing, tighter rules for approving a mortgage will be adopted by banks in order to avoid the accumulation of toxic assets on their balance books.
Recently, Fannie Mae has announced that they will not work a home owner who strategically defaulted on their home loan until a waiting period of seven years has elapsed. While such strategic defaults have become more common during the recession, such homeowners would otherwise be in the market for a home. In addition, people who have defaulted on their mortgage because they could not afford monthly payments will have to wait two years until they can buy. These changes in Fannie Mae policy may signal a general sentiment shared by banks that now is not a good time to be making home loans, and that it is better to what and see where home values settle in the next couple years.
Indeed, mortgage applications have fallen to a 13 year low. This is surprising given the population growth being experienced in some areas of the country. But it also reflects the current economic reality, people who don’t have steady full time employment aren’t likely to be in the housing market. In addition, some people who do have full time jobs may be risk averse to buying a house as they have seen friends or family members default on a home. Why risk buying a home if you might not have your job in a couple years?
In addition, American consumers are changing their buying habits in specific way: less spending and more savings. This is the inevitable response to a major economic recession, such as when Americans faced the Great Depression. The Great Depression triggered a generational pattern of thrifty spending and regular saving, meaning that the current change in American consumerism may affect more than sales of exports from other developed countries, but could also impact the housing market’s long term prospects.
When will the housing market recover? Once again, a plethora economic factors will come into play, but it is certainly possible that the housing market won’t see a significant correction until the spring of 2011, or even later.