Housing Prices To Fall Even More?

by: Shaun Connell

Earlier, I wrote about how Warren Buffett and John Paulson both liked housing as an investment right now, and then agreed with the reasoning presented.

After thinking it over some time, I'm now personally looking over local listings for investment reasons, and will likely try to buy a home over the next 12 or so months. Over the long term, I'm bullish on real estate as a great tool for personal financial security or even income investments.

But that doesn't mean, of course, that housing prices couldn't fall in the meantime. It's possible for an asset to be a great long-term investment and still fall -- even a lot -- in the short or medium term. I wrote about this in my gold prices article from several days ago.

This is particularly relevant right now, because while the real estate market is certainly cheap and a house is a good investment for many, the housing market overall is likely to keep falling for the short-to-medium term.

Foreclosures 2.0: Cleaning the System

In 2011, the "robo-scandal" essentially obliged banks to hold back on foreclosures because of pending settlements and possible fines. It's been about a year, and the foreclosures look to start picking up again.

Unlike what started the entire financial crisis, these foreclosures are not on subprime mortgages -- these are just regular mortgages from regular people who just can't afford to make their mortgage payments. Many are even engaging in "strategic default".

According to Reuters:

"Although the national unemployment rate has fallen to 8.3 percent from its peak of 10 percent in October 2009, nearly 13 million Americans remain jobless, meaning many are struggling to keep up with their mortgage payments.

Real estate company Zillow Inc says more than one in four American homeowners were "under water" or owed more than their homes were worth in the fourth quarter of 2011. The crisis has wiped out some $7 trillion in U.S. household wealth."

The above has some commentators, like the ever bearish Zero Hedge, believing that we're in for a new "tsunami" for real estate markets around the nation. According to the above Reuters article, foreclosures are already up 43-64% in Tampa, Chicago and Miami.

What happens if suddenly the market is flooded with millions of new houses for sale? Prices probably won't fare too well. Rental income will still be workable (people have to live somewhere).

But perhaps more importantly for investors in other markets, there's a good chance this will be seen as the potential -- or the catalyst -- of a double-dip recession, pushing Bernanke to fire up the printing presses again, like we discussed in the article When Will QE3 Begin.

Interest Rates Rising

Let's assume that the fallout from the above is minimal, and the economy begins the "recovery" that so many are talking about. Rather than seeing QE3, there's a chance the Fed will go the other way -- increasing interest rates. Overall, the impact will be fairly obvious -- mortgage rates won't be as low as they are right now.

The impact is fairly severe -- with higher mortgage rates, there will be fewer mortgages. This will either stall home prices or push them down even further. Remember, the housing market doesn't have to keep up with the "economy's" recovery, at least not in the short run.

Housing is still a great long-term bet, and in some markets, it's just a cheap no-brainer. But for the overall markets -- and some in particular like Tampa and Chicago -- the storm isn't likely over yet.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.