Don’t Believe the Hype: Housing Won’t Collapse in 2010

Despite the fact that housing prices and home sales are outperforming historical trends for this time of year, many
economists and housing market observers remain pessimistic, offering dire predictions of a second large decline in
home prices in 2010. While we acknowledge that serious troubles remain in the nation’s housing markets, we think
predictions of a second “collapse” of the housing market are exaggerated.
Our view is that recent trends point to continued stability in the housing market, and if efforts to ease foreclosures can
and do succeed, there could be significant recovery in housing values in spring 2010. Housing demand is strong, as
indicated by recent increases in sales activity at a time of year when transactions usually fall. With the 25-MSA RPX
Composite 30% below its peak, low prices are attracting owner-occupiers and investors alike into the housing market.
Stories abound of fierce bidding pushing up prices at foreclosure auctions. On the supply side, we are encouraged by
falling inventories of new and existing homes as well as declines in new-home permits and starts.
The principal threat to the housing market is the looming inventory of distressed homes. Delinquencies have reached
their highest levels in decades. Foreclosures and bank repossessions are also elevated from historical levels, but they
have not kept pace with rising delinquencies. As a result, there is a glut of seriously delinquent mortgages awaiting
foreclosure and a glut of foreclosed homes awaiting auction and/or repossession.
Bearish observers of the housing market point to the fact that government loan modification programs have prevented
the inventory of distressed properties from entering the housing market and argue that distressed homes will flood into
the market when the programs end, driving up the supply of unsold homes and pushing down home prices.
We think it is more likely that distressed properties will enter the housing market at a controlled rate that can be
absorbed by the existing housing demand without drastically reducing prices. Thanks to federal bailout money and a
general improvement in their financial health, banks have been relieved of the urgent need to liquidate their assets. As
a result, lenders and government entities like Fannie Mae and the FDIC have been able to curtail sales to raise prices
and avoid recording losses on properties. There is no incentive for banks to foreclose on a home if they will suffer a
greater loss from liquidating the property than carrying the delinquent loan. Thus, banks are not likely to foreclose on,
repossess and try to liquidate the current pipeline of delinquent mortgages in a rapid manner that would depress the
value of the properties they are trying to sell. Moreover, the Federal Government will probably continue to support
banks seeking to take a measured approach to liquidating distressed properties, either through the Home Affordable
Modification Program (HAMP), the Troubled Asset Relief Program (TARP) or by other means.
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In contrast to bearish housing market observers, who argue that high unemployment will weigh heavily on housing
demand in 2010, we are heartened by the fact that housing demand is currently so robust despite the fact that
unemployment is high. Once the unemployment rate hits its peak and begins to decline, which many expect in occur
within the next two or three quarters, housing demand should get stronger.
Bears argue that the government’s interventions to boost housing demand are unsustainable and temporary, and its
efforts to modify distressed mortgages have only succeeded in shifting the burden of foreclosures into the future.
Eventually, the bears say, the government’s manipulations of the laws of supply and demand will have to come to an
end, and when they do, home prices will crash once again.
As the housing market is central to the health of the economy as a whole, we are confident that the government will
continue its efforts to support housing demand and mitigate foreclosures for the foreseeable future. We are
encouraged by the Federal Government’s commitments to support the housing market well into 2010. The Federal
Reserve has indicated that it will help keep mortgage rates low until the economy is capable of sustaining growth on
its own, and it will keep providing liquidity to the housing market by purchasing agency mortgage-backed securities
through the end of March 2010. Congress has extended the housing tax credit to include home sales that close by June
30, 2010, and the Treasury has indicated that it will extend the TARP to October 2010 and focus much of the new
commitments under the program on mitigating foreclosures and supporting the housing market. If the government and
Wall Street can find a way to effectively mitigate foreclosures, home values may well go up in 2010.
While we are not out of the woods yet, our view is that housing is showing signs of stability, markets are showing
signs of rational behavior and everyone is starting to understand the fundamental problems that brought us here. As
such, we think the bears are overdoing it.