When the bottom fell out of the real estate market in 2008, democrats and republicans alike clamored for immediate action to save the housing market. President Obama, after taking office in early 2009, took what he perceived as steps to stabilize the housing markets, which included an $8000 tax credit for first time home buyers and billions dedicated to mortgage modification programs – all designed to stabilize home prices.
The problem, of course, was that by “stable” the President meant to keep home prices at their over-inflated bubble top levels of 2006-2007, rather than the generally accepted norm of the prior century.
An excellent review of the historical value of homes was put forth by Glenn Beck in February of 2009, where Beck charted the value of homes all the way back to 1890. From this data, we can extrapolate a home value, in real terms (adjusted for inflation), of around $110,000 to $130,000 historically for the hundred years prior to the boom which started around 2001. By 2006, values skyrocketed over 60% to about $200,000.
Once the bubble burst, prices began to return to the historical average – another way to put it, is that home values were returning to their historically stable values. This return to balance was derailed by pulling forward demand with an $8000 tax credit, billions in bailouts for failing institutions like Fannie Mae, Freddie Mac and large banking conglomerates, and banks’ reluctance to report the seven million homes in the delinquent “shadow inventory.
After all of the money spent to stabilize prices, what actually happened was that the free market’s attempt to correct itself was merely delayed, not prevented as some in Washington would have us believe.
The fact is, nothing has gotten better in the housing markets, and it is going to become clearly evident in the very near future. Karl Denninger of The Market Ticker shares his perspective:
At historical lows interest rates only have one direction to go for mortgages: UPWARD.
Yet it was those historical, ridiculous lows that led to the bubble in the first place.Â It was 1 and 2% “teaser rates” and Option ARMs that caused the price explosion.Â Since the rate environment has been artificially suppressed, the price correction necessary to fix the problem has not been able to occur.
We are going to see a huge further decline folks.Â It is inevitable.
“Let it crash” was the right decision in 2007, it was the right decision in 2008, it was the right decision in 2009, and it is the right, and inevitable, decision today.
If you want the housing market to “recover”, it must first adjust out the distortions from the previous decade.Â It cannot be otherwise.Â In addition, rates must normalize so that a durable bottom can be found and formed.
When will President Obama and his administrationÂ come to grips with reality?
Neither President Bush or President Obama understood the reality of the situation. If we had to guess, President Obama will stay the course with stimulus packages (though his administration denies this), artificial propping up of housing markets and bailouts for large institutions when they’re needed for as long as is possible.
They’ll also receive help from industry experts like the National Association of Realtors, who has seemingly been fraudulently padding the numbers to maintain artificially high home values.
Nature, however, will ultimately take its course and we’re getting to the point now that the market has pulled forward about as much demand as possible. With employment in the toilet and mortgage lending coming to a standstill as a result of fewer qualified buyers, the charade doesn’t have much longer to go.
As we pointed out in a previous housing market assessment, do not be surprised if home values fall another 30% from here. In our view, this is a conservative estimate, and we could see a significantly higher drop over the coming decade. Though it is hard to imagine another drop of this magnitude, we only need to look at Japan whopping 75% housing decline since their bubble top in the early 1990’s – and they have yet to recover.
Prepare for another crash. It really is inevitable at this point.