The Housing Market: A Choppy Recovery or a “Double Dip”?

Despite a year of government effort, the recovery in the housing market that many pundits have convinced themselves is here appears to be stalling. It’s true that for a short while home sales rose, but as many predicted that was simply buyers getting in ahead of the expiration of the temporary government tax credit. To be eligible, buyers had to be in contract by April 30th and closed by June 30th. Once that deadline passed, sales went back into the doldrums. So the government extended the deadline. Sure enough, as the new deadline approached sales climbed again. But once again the boost appears to be only temporary. As a result, home prices have now fallen consistently for the past six months.

The government has tried everything it could think up to help. Obama hoped to prevent defaults with a plan designed to encourage banks to refinance the mortgages of those unable to pay. The Fed held down mortgage rates by buying up mortgage-backed securities. And Congress offered that enticing tax credit to qualifying buyers.

But even taken all together, these initiatives have not made any lasting inroads—in part because they can’t get to the real root of the problem, namely that affordability is no longer the driving factor behind many foreclosures. The problem now is negative equity. Everyone thought the typical individual most in need of help was the homeowner deeply underwater on his mortgage (owing far more than the house is worth in this market) and who then, say, loses his job. However that’s less and less frequently the case. Now we see a growing number of underwater borrowers who are merely making a practical business decision. They are simply walking away from mortgages that they can in fact afford, but that is on property they can’t see ever selling at anything but a huge loss. On top of that, banks are balking at rewriting mortgages, despite incentives to do so since too often borrowers default later on anyway. A nationwide spike in home sales would help reverse all this, but those tax credits seem to have done little more than move sales around—speeding up sales that would have happened anyway.

So the market stays becalmed. The steady drumbeat of foreclosures continues as the glut of available homes grows. By some estimates, it will take more than eight years of steady sales to clear the backlog of houses already held by banks, even if no more homeowners default. This overhead holds down prices, which in turn makes it that much harder for the homeowner with negative equity to “climb out” of it.

There are plenty of scapegoats—this administration, the previous administration, lax financial oversight, lenders too willing to lend and buyers too willing to borrow. But looking backward won’t get us anywhere. Historically, sustained housing recoveries are far more dependent on job growth than on anything else including interest rates, widely thought to be some kind of silver bullet. So disappointing jobs figures will always equal bad news for the housing market.

So will we stagger ahead with fitful progress, or slip back into the dreaded “double dip” recession? The answer lies in the jobs numbers. Keep a close eye on them. If millions of Americans continue to remain out of work, a turnaround could be a long time coming.

Dylan Taft is a tech savvy Ulster County, New York real estate professional, working with a small but, dedicated staff. Visit Dylan’s professionally optimized website for more information on the latest property marketing strategies, and details on the Ulster County real estate area.