A false floor for housing prices?

Although the government efforts to support the housing market seemed to have created a potential bottom in the future for housing prices, could that be a false bottom that leads to a trap door if the overall economy doesn't improve or the government runs out of stimulus money? From a Wall Street Journal story:

In response to gigantic government efforts to support the mortgage market, house prices are showing signs that they mightn't have much further to fall.

But prices have to be built on more than cheap financing. Indeed, government leverage could set the stage for another downdraft if the wider economy doesn't recover fast...

Sharply lower house prices and ultracheap mortgages were bound to spark bargain hunting. Government intervention in credit markets has helped push down rates on standard, fixed-rate, 30-year mortgages to 4.85%. That is the lowest level since Freddie Mac's records began in 1971. After months of decline, house prices jumped 1.7% in January from December, according to the Federal Housing Finance Agency.

This was a small sign the vicious circle in housing can be broken. Policy makers fear the more prices fall, the more likely it is that underwater borrowers choose to default, increasing foreclosures and forcing prices down even further...

However, two countervailing forces could thwart a rally.

First, borrowers mightn't want to take on more mortgage debt while personal balance sheets are still stressed, something not reflected by the affordability index. At the end of last year, personal disposable income covered 75% of household liabilities. In 1991, it was 114%.

Second, rising unemployment could continue to take a heavy toll. It makes the employed more cautious about large purchases, but unemployment does most damage by driving foreclosures higher -- even among borrowers with sounder personal balance sheets...

Even Fannie Mae's 2005 mortgages, most of which should have been conservatively underwritten, are suffering unusually high default rates.

Given this backdrop, the government will be tempted to keep stepping up mortgage subsidies. The risk: Buyers are lured in by artificially cheap financing, only to find the house-price floor subsequently gives way.

Home prices to hit bottom by summer '09?

Yes, it is true that we've constantly been hearing false predictions of when the housing market will hit bottom, both in terms of sales, but more importantly in terms of price. I always tend to consider the source of such predictions, and generally discount those from trade groups such as the NAR or the MBA and give greater credence to universities and private data companies.

But at a recent forum sponsored by Standard & Poor's and the Chicago Mercantile Exchange, a panel of economists actually agreed that we should be seeing some pricing stability return to the market by next summer. From a CNNMoney.com story:

Several panelists, including Economy.com's chief economist Mark Zandi, Goldman Sachs (GS, Fortune 500) economist Charlie Himmelberg, S&P managing director David Blitzer and S&P senior economist Beth Ann Bovino all agreed that home prices would stabilize sometime during the summer of 2009.

"The bottom of the housing market is coming into view," said Zandi, whose recent book "Financial Shock," examines how the subprime mortgage crisis occurred. "House prices, based on the S&P Case-Shiller index, are down 20% peak-to-trough and I expect them to fall another 5% to 10%."

"The key is housing affordability," Zandi said. "The [price] decline is beginning to restore affordability, which is now near its long-term average. In some places, Boston, Chicago, Denver, Orange County, affordability has been restored and those markets have stabilized."...

One piece of good news noted was home sales volume. The number of homes sold each month has already leveled off nationally, staying within a narrow range nearly every month this year at an annualized rate of about 5.5 million units a year.

Bovino said her forecast for home price decline is slightly more bearish than Zandi's, mostly based on S&P's belief that the country is now in a recession. With the economy struggling, job losses rising and a tough lending environment, she expects prices to fall another 10%.

"We think there will be an overshoot [with prices going beyond their logical bottom]," she said, in part because so many buyers are afraid to get into the market. "Nobody wants to catch a falling knife," she said.

And after prices do bottom out, Himmelberg expects them to remain fairly flat for a year or so...

The panelists were careful to couch their optimism with caveats. Zandi, for example, points out that there is a lot of uncertainty about the fate of Fannie and Freddie, in the wake of their government takeover.

There is some speculation that the companies will be downsized by a new administration after the presidential election in November.