Summary
Unsold inventory is at an extremely high level, which will be increased significantly as mortgage foreclosures continue to ramp up through 2008. The median home price has dropped only 4.6% year over year. Even with historically low interest rates, the credit crunch will continue to suppress demand.
Analysis
While some may read this article and think it speaks in a bearish tone, I believe it does not delve deep enough into how longstanding this downturn could be. There are several issues throughout this article that should not be cast aside as just typical housing stats. The median home price dropped only 4.6% year over year. After multiple years of 10%+ price appreciation, does this slight dip in prices seem reasonable for a market in decline? In order to jump start demand, prices need to come down. If the existing home owners aren't willing to do that (as evidenced by this minor decrease in prices), the banks will be. As foreclosures mount to record levels by the end of this year, the banks will be forced to create downward pressure on prices as they try to dispose of these assets. This will, however, increase the supply of unsold homes to even higher levels and create a stagnant housing market.
Adding to the chaos is the current credit crunch coupled with low interest rates. What good is a 5.5% loan if no one will give the loan? Most people with a 750 FICO and a 20% down payment bought during the last boom, so who will the banks loan to? Don't think it is up and coming college grads or even starter families. Most were priced out of the market a long time ago (or are in foreclosure proceedings) and can't get back into looking for homes until prices come down.
Another potential problem is raising the caps on government-backed loans. While I do feel current caps are ridiculously low for high cost of living areas such as California, the solution isn't to balloon the cap over $700K. All this does is artificially support unrealistic home prices that are out of whack with household incomes.
This article mentions some analysts see 2008 as the year the housing market turns around, I believe it is the year that the housing downturn really gets started. Based on the current situation and outlook going forward, I don't see any type of stabilization until 2010 at best. Plan accordingly.
