Friday, October 10, 2008

IV - Financial Meltdown: How will it affect us?

By Stephen Gandel and Paul J. Lim
Money Magazine
Last Updated: October 9, 2008: 12:29 PM ET


The global contagion has spread, but the source of the crisis is still bleeding. From struggling homeowners who can't make their payments to would-be buyers, almost everyone is wondering where home prices are heading next. Here's some insight.
Is there any hope for home prices?

The burst real estate bubble that kicked off this crisis is unlikely to reinflate quickly. "I don't see the slump in housing prices ending anytime soon," says Dean Baker, co-director of the Center for Economic Policy and Research. The government takeover of Fannie Mae and Freddie Mac lowered mortgage rates briefly (which helps buyers afford your home).

But the bankruptcy of Lehman Brothers, the failure of Washington Mutual and the sale of Wachovia, as well as the stock market sell-off, have made investors nervous about everything, mortgage bonds included. And that has pushed home-loan rates right back up.

The proposed government bailout could help home prices if the banks that get relief turn around and make new loans, but it's not clear that they will. More important, housing prices are not just a factor of mortgage rates. Foreclosures and slow sales have left 4-million-plus homes on the market, nearly half a million more than two years ago. That could get worse before it gets better if rising unemployment translates to fewer buyers to work off that fat inventory.

"In the long run none of what we're doing now is going to matter that much to real estate," says Wellesley economics professor Karl Case. "Home prices have to do with the scarcity of land and perception of that scarcity."

Until homes for sale are again scarce, it will continue to be better to be a buyer than a seller. Most economists expect another 10% drop in housing prices nationally over the next year. Some, like Nouriel Roubini of New York University, say a 15% to 20% drop is more likely.

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