Is Another Home Buyer Credit or More Foreclosure Relief In The Works as Housing Market Faces Double-Dip

This article was last updated on January 12

With home values continuing to drop to record lows across the nation many home buyers are reluctant to make a purchase this year; which places even more pressure on home owners looking to sell. Recent data from online realty site Zillow suggest that home prices will continue to fall until late 2012. This is not good news for the 28% of homeowners who are under water—i.e. owe more on the mortgage than their house is currently worth.

“Home value declines are currently equal to those we experienced during the darkest days of the housing recession. With accelerating declines during the first quarter, it is unreasonable to expect home values to return to stability by the end of 2011,” Zillow chief economist Stan Humphries said.

The Silver Lining in Falling Home Prices

While the drop in home prices is good for buyers with solid credit and financial resources, it may also spur the government to take action in supporting the housing market once again. This could be done in multiple ways:

1. Continued support of the GSE’s – Freddie Mac and Fannie Mae. These two firms, along with the FHA, back close to nine of 10 new home loans today. Following their collapse and entry into government enforced conservatorship these two government sponsored entities (GSE’s) together have asked for about $164 billion of tax payer support. While the public and most politicians want to end this support and dissolve the firms sooner rather than later, it is unlikely to happen against the current housing market back drop. In fact with home prices falling and the private sector not picking up the slack, these two mortgage giants are likely to stay in place to support the housing market. While this is bad news for tax payers, it does create lower rates for home buyers and those looking to refinance.

2. Continued foreclosure moratorium- Various programs have been put in place to slow or halt foreclosures, however few have worked. Stronger regulations are forcing banks to evaluate foreclosures more carefully, which while slowing down foreclosures, is still only a temporary solution. There have been rumors that the administration is even thinking of allowing principal balance reductions, but this is going to be very difficult to sell to a cynical public. In any case, getting rid of the glut of foreclosed homes (one out of every 1,000 homes is now in foreclosure) is the only way that house prices and the overall market will start to see a sustained recovery.

3. More Home buyer tax credits and stimulus – If another housing market crash seems imminent, this may be the final option the government has. Past home buyer credits (still available for some groups) were hugely successful in stabilizing the housing markets, but not broadly popular because they only directly benefit relatively few tax payers. Also with the prospect of a continued fall in home prices, the $8,000 credit may not be enough to entice new home buyers. Case in point: home buyers who took advantage of the credit in 2009/10 have seen an average 10% drop in home prices or about $23,000 on the median national home price. This puts them $15,000 in the hole after the credit!

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