Despite New Optimism, Housing Gains Not a Sure Bet

A poll of 24 economists conducted by Reuters predicts that after seven straight years of declines, U.S. home prices are poised to rise next year. A reversal in the U.S. housing market could have a significant impact on the economy as, historically, the housing market has been credited with leading the economy out of nearly every recession over the past century.

Of course, past results are no guarantee of future performance and it may take more than a firming up of housing prices to provide the jolt so desperately needed to boost the economy. Having said that – and even with the apparent optimism of the survey participants notwithstanding – a recovery in housing prices at this time is far from a certainty.

The Uncertainty Facing the Housing Sector

Since 2005, house prices have fallen over thirty percent and some 11 million homeowners now hold mortgages greater then the current market value of the underlying property. These “underwater” borrowers remain a default risk that, along with the backlog of homes entering into the foreclosure process in the coming months, could continue to destabilize property prices.

This past February, a group of the largest U.S. mortgage lenders received permission to take action on a glut of homes slated for repossession. These properties were in a procedural limbo following a 2010 inquest into allegations that some banks were foreclosing properties without the proper documentation.

This appears now to be settled and foreclosure proceeding for these properties are expected to be fast-tracked in the coming months. In addition, the number of properties that have been served a first foreclosure notice rose by seven percent in March compared to February; this is the third straight month of increases. Clearly, banks are ramping up efforts to recover payment from delinquent mortgage holders.

Because foreclosures usually sell at a reduction, a wave of foreclosures in a given area can lower the value of adjacent properties. This has many potential home buyers waiting on the sidelines delaying purchases on the expectation that house prices could still fall. After all, everyone wants to secure the best bargain possible, but the last thing the economy needs right now is an over-supply of discounted homes pushing home prices lower.

This same train of thought may also be affecting housing starts and this could help explain the unexpected drop in housing starts in March. The latest data shows new starts fell by 5.8 percent for the month to an annualized rate of 654,000 new starts. This is considerably lower than expected and marks the worst result since last October.

While the survey participants may believe that property prices will soon recover, there is sufficient evidence to question this outlook. What is not open for debate, is the importance of the housing sector on the overall health of the economy.

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