Housing's Double Dip: No Sweet Surprise

Spring is here but don't expect any bright basket of goodies for the housing market. I think we will see a double dip, but it won't be made of sugar. There are a few analysts out there still clinging to the irrational notion that that US housing market is not headed for a double dip recession. There are even some housing bulls like Jim Cramer, who say home prices have bottomed. Well, they may as well be on an Easter egg hunt in which all they come up with is rotten eggs. Why do I say this? Housing news is dismal. We are seeing continued high foreclosure rates and poor housing starts. Inspection of the trends in home prices as reported in the January S&P/Case Shiller Home Price Indices portends otherwise. February was no better with single family home prices in the 10 metropolitan statistical areas used for the index falling for the 8th consecutive month. If we accept that a second dip in housing prices is upon us, then what can we expect in the coming months? 1. Loans will be more expensive: Economic, regulatory and market factors are converging to increase mortgage interest rates. First, the Federal Reserve is not expected to continue to support low rates with additional quantitative easing initiatives. QE2 will be ending soon and there is no talk of QE3, and without this artificial support we can expect rates to trend upward. Conventional loan pricing has already gone up. Second, FHA loans will get more expensive as well when the monthly mortgage insurance payments go up from 0.90 to 1.15% a month on April 18th. And third, changes in the loan originator compensation rules may result in increased mortgage interest rates and costs for many borrowers. 2. Short sales and foreclosure sales will continue to make up a large part of the buyers market. Borrowers will continue to seek deep value in short sale and foreclosed properties and choose these properties over traditional sales. Adding fuel to this fire, financial institutions will increase the number of short sale and foreclosures properties they release to the market in anticipation of the settlement of the government “robo-signing” lawsuit. 3. Contrary to industry rumors, there will be no nation wide principal reduction program. The national mood for budget tightening means homeowner assistance programs in general will lose support and new programs will not be started. Even if the government receives a 25 billion settlement from the financial institutions, this amount is a drop in the bucket for the estimated 800 billion dollars required to write down all the underwater mortgages in the country. 4. Although there have been improvements in the national employment picture, other economic factors such as the high price of gas, may prevent many potential buyers from venturing into the housing market. Over supply coupled with weak demand will keep housing prices low. I expect housing prices to continue to decline for the remainder of the year. So as in 2010, 2011 will not fill our housing market baskets with sweet spring surprises, and likely not have sugar plums dancing in our heads by fall. Rather, we may find ourselves on a bumpy ride back down before things get better. A sour note, yes. But keep a stiff upper lip, friends and never lose hope. We always have spring 2012.