Will Home Values Stabilize Without Government Support?
Home values appear to be stabilizing in certain cities and neighborhoods. Does this mean the real estate market is recovering, or is it just a temporary condition because of government subsidies?
Government support has played a key role in helping to lift home sales and prevent further escalation of home foreclosures, bank failures, and home price declines. However, this does pose a question about the strength of the real estate market after these subsidies are eventually removed.
Interest rates have remained artificially low because of the Federal Reserve’s commitment to stimulate home sales and refinancing by purchasing mortgage-backed securities. Once the Fed ends this program, interest rates are expected to rise in order to attract mortgage investors, and of course higher rates could reduce the pool of qualified borrowers.
The home buyer tax credit has also been an effective subsidy for stimulating home sales. There is no doubt that demand has been raised by this lucrative offer, which was recently extended and expanded to include some previous homeowners, in addition to first time home buyers. The tax credit does create an artificial demand for a limited time period, which means the market may lose momentum after it expires.
The Government’s attempt to subsidize loan modifications may be successful at keeping many real estate foreclosures off the market, however, a substantial number of those modified home loans are re-defaulting, which could only prolong the foreclosure process and the true recovery of the housing market. Downward pressure on home prices may be the end result if banks need to quickly sell a growing portfolio of homes, referred to as the shadow inventory.
Then there is the money being funneled to Fannie Mae and Freddie Mac to compensate for default losses. FHA may also need bail out money, and reduce their risk of loss by making their mortgage guidelines more difficult to qualify.
Home sales are a crucial part of our economy, and Government help is buying time in the hope that investor and consumer confidence will soon recover, but the question remains about how the housing market will fare when subsidies for real estate and mortgages end.
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