Have Home Prices Stabilized?
The real estate market has come back to life in some areas, with home prices starting to stabilize and rise again. Is the real estate market truly recovering, or just temporarily resuscitated from government life support?
The Federal Government has taken extraordinary steps to help lift home sales and prevent further escalation of home foreclosures, bank failures, and home price declines.
While this support has maintained the integrity of the real estate market, it does raise a question about the sustainability of home prices after government subsidies are removed.
Mortgage rates have remained artificially low because of the Federal Reserve’s commitment to stimulate home sales and refinancing by purchasing mortgage-backed securities. Once the Fed ends this program, interest rates are expected to rise in order to attract mortgage investors, and higher rates can reduce the pool of qualified borrowers.
The home buyer tax credit has also been an effective subsidy for maintaining home prices. Housing demand has been increased by this lucrative offer, which was recently extended and expanded to include some previous homeowners, in addition to first time home buyers. However, the tax credit creates an artificial demand for a limited time period, which means the market may lose momentum after it expires.
The Government’s attempt to subsidize loan modifications may be successful at keeping many real estate foreclosures off the market, but a substantial number of those modified home loans are re-defaulting, which could only prolong the foreclosure process and the true recovery of the housing market. Downward pressure on home prices may be the end result if banks need to quickly sell a growing portfolio of homes, referred to as the shadow inventory.
Then there is the money being funneled to Fannie Mae and Freddie Mac to compensate for default losses. FHA may also need bail out money, and reduce their risk of loss by making their mortgage guidelines more difficult to qualify.
Sustaining home prices is a critical part of our economic recovery, and Government support is buying time in the hope that investor and consumer confidence will improve, but the question remains about how prices will fare when federal subsidies for real estate and mortgages end.
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