Although the housing market has shown signs of improvement lately, the recovery may not be on firm ground.
The year is ending on a brighter note than it began. Sales of existing homes are running at the highest pace in more than two years. Inventory of unsold homes is the lowest in more than a year. And home prices are falling at a much slower pace than they were this time last year.
But economists caution that a good part of the improvement is tied to government assistance – low interest rates that stem from the Federal Reserve’s heavy buying of mortgage securities and a tax credit worth up to $8,000 for first-time home buyers. That credit has been extended and expanded to include some repeat home buyers for 2010.
With a still-weak economy and unemployment in Massachusetts still over 8 percent, the question is whether housing can rebound from its worst downturn since the Great Depression without the government propping it up. The Fed’s $1.25 trillion securities-buying program is scheduled to end early next year.
“Right now, we’re not in a sustaining recovery,” says Lawrence Yun, chief economist at the National Association of Realtors. “We’re on the cusp of a self-sufficient recovery, but we’re not there yet.”
Indeed, Mark Zandi, chief economist at Moody’s Economy.com, predicts the housing market will get a little worse before it gets better.
Median existing home prices already are down nearly 30 percent from their peak in 2005, and Zandi sees them falling further next year. He forecasts prices skidding to a bottom next year and slowly returning to last quarter’s national median price of $170,700 – in 2012. Meanwhile, foreclosures will climb to 1.9 million in 2010, outpacing 2009’s expected total by 200,000.
“Foreclosures will be high for a long time,” Zandi says. “And property values won’t increase.”
Yet, not all economists are seeing such a bleak outlook for the housing recovery.
Brian Bethune at IHS Global Insight says prices may rise slightly over the next year or two, then more rapidly after that.
The pace of housing’s recovery is hard to predict because so much depends on other factors.
For example, average interest rates for a fixed, 30-year mortgage have hovered around 5 percent much of this year. Higher rates could send a chill through the housing market by scaring off potential buyers, further depressing housing sales and prices.
Another wild card is unemployment. The Federal Reserve forecasts national unemployment will remain well above 9 precent a year from now and higher than 8 percent in 2011. As more Americans lose paychecks, many will fall behind on their mortgages, adding to foreclosures and dragging down home prices.
In many parts of the country, home price are so far below their peaks that millions of homeowners will owe more on their homes than they’re worth for years to come.
Among the metro areas showing price drops is the Boston area, which is projected to decline from a median price of $309,000 in the fourth quarter of 2009 to a bottom of $303,000 in the fourth quarter of 2010.
For all that, though, we’re cheered by what’s happening. The price drops that have plagued Massachusetts for years are clearly slowing. The government intervention has indeed boosted the number of sales, and in time consumer confidence will take over. We will not see the go-go market that we enjoyed in the early part of the decade. But we should not expect to. What we should expect are homes we can afford, and a housing market that’s more liquid than it has been. Both are here.
