While conventional wisdom has it that the housing market has bottomed, some experts think otherwise.
Economist Gary Shilling is one of them. He sees the number of Americans’ homes under water, that is, worth less than the balance of the mortgage, doubling from the current high of 13 million.
"A couple of months ago, a lot of people had hoped that the housing collapse was about over," he tells MSN Money. "But it was more hope than reality."
Part of the problem is that subprime borrowers, the launch pad of the national housing collapse, are being joined by supposedly “prime” borrowers who took out too much money to buy oversized homes. Many now face a double-whammy of rising adjustable rate mortgages and a shaky job market.
In the first quarter, the percentage of prime mortgages in delinquency or foreclosure doubled from a year earlier, to almost 6 percent. For the first time, prime borrowers made up the biggest portion of new foreclosures.
In addition, mortgage rates ticked up above 5 percent, a sign that the Fed’s program of artificially holding down house financing costs had run its course.
Coming foreclosures will push inventories higher. And that will send home prices lower, Shilling says.
Shilling says home prices will drop so far that up to 25 million homeowners will be underwater.
"As long as you have those excess inventories, you have downward pressure on prices. It is no more complicated than that."
As a result, the economy and stock market will suffer, Shilling says. He sees the Standard & Poor’s index falling to 600, a 36 percent drop from Wednesday’s close.
Besides the obvious pain for home mortgage borrowers stuck in their homes, falling home prices does not bode well for the struggling banking sector, which still holds billions of dollars in mortgage-back securities no one will buy.
The housing crunch is so bad that Treasury Secretary Tim Geithner has been unable to sell his Larchmont, NY home after moving to Washington.
After dropping the asking price to $1.575 million, he has rented the home for $7,500 a month, the Associated Press reports.
Nevertheless, commercial real estate icon Sam Zell predicts that the housing sector will bottom sometime this summer and then start rebounding within eight months.
“If you look at household formation, you look at the fact that we built 1.7 million single family houses in 2006,” he tells Bloomberg TV.
“And we’re now building 350,000 houses [at an annual rate]. I think when you add all that up, the supply-demand sometime this summer… will reach equilibrium.”
Furthermore, housing inventories are going down, while affordability is going up, Zell notes.
“The government is making a serious effort to provide financing. I think it’s slowly working.”
Improvement will continue if foreclosures accelerate, Zell says, “because I think they represent a drag on the market.”
“I don’t view this summer as a rebound, but I think we’re going to find some level of stability,” he says. “I think it will probably take six-seven-eight months to straighten itself out.”
Zell says it is a mistake for people to look at housing as an investment. The housing crisis could have been avoided “if everybody was focusing on where they wanted to live and what was a good value for living as opposed to what they could buy it and flip it for.”
Some are more bearish on housing than Zell. Economist Robert Shiller notes that home prices are still dropping.
“Maybe the rate of decline has gone down a little bit, but it’s still 2 percent a month,” he tells the Financial Times.
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