You Would Have to Be Fool to Buy a House Now

When Will the Housing Recession End? A Graphical Illustration Why the Downturn Will Persist Through 2013

What We Know Will Happen

Adjustable-Rate Mortgages Will Reset

Adjustable Interest Rate Mortgages will continue to reset through 2012.  These resets will trigger a steady flow of foreclosures.  While there exists a material supply of foreclosures, house prices can not maintain inflation-adjusted value and the Housing Market will not recover.

The worst offending Affordable Mortgages, the Option-ARMs, are only now beginning to reset.  These mortgages will result in massive foreclosures within the markets they were utilized.

While the bulk of ARM resets will end in 2012, it will take up to a year to process and dispose of the foreclosures which result.  The disrupting influence of these defaults will not be resolved until well into 2013.

What Needs To Happen for the Housing Downturn to End

Unemployment Rates

Stimulus Spending will obviously distort the unemployment rate, but such spending is neither efficacious nor persistent.  Given the rapid rise in unemployment, and the economic fundamentals which point towards further job losses, the Stimulus is unlikely to overtly reduce the unemployment rate.


Vacant Houses

The number of vacant houses in the U.S. is at a record high and rising.  House prices will not stabilize or recover while there is so much excess inventory available.

The percentage of all houses vacant further illustrates the excess inventory problem.  This percentage is at a record high and is rising.

A dramatic and sustained reversal of the vacant housing trend is required to end the Housing Depression.  Given the requirements for stabilization, it is unlikely that vacant housing inventory will have returned to sustainable levels by 2014.

For Sale Houses

The number of houses for sale is approximately double the level consistent with stable prices.

While a reduction in supply to sustainable levels by 2014 is possible, rising unemployment, tight credit conditions and falling demand make it unlikely.  If prices fall far enough the supply of houses for sale will decline steadily, but such valuation levels do not yet exist and the excess supply will take considerable time to work off.

Percent of Occupied Housing Units Owned

The distortion to homeownership which occurred during the Housing Bubble will inevitably reverse itself.  While the reversion is occurring, there will be considerable pressure on house prices and the broader market is unlikely to stabilize.

The current slope of the homeownership rate trend is consistent with a return to sustainable levels by 2014.  While it may take longer than four and a half years from today for the distortion to fully reverse itself, the correction is unlikely to occur in less time.

Conclusion

Analyzing existing economic conditions produces interesting conclusions for the expected duration of the housing downturn.  The Housing Market can not fully stabilize or recover until the fundamentals which influence prices, purchasing activity and homeownership return to sustainable levels.  Given our present economic reality, prevalent housing-related trends and what needs to happen to end the malaise, it is unlikely that the Housing Market will recover before 2013 – 2014.

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