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Monday, December 1, 2008

Will home values stop DECREASING?

Blogging From The Desk of Alicia Lagarde-Craig

Economists at the semi-annual National Association of Home Builders forecast conference are saying not soon, but that the end is in sight. The consensus says that home prices will bottom out as early as the middle of next year.

The latest conference was downbeat, but with a glimmer of hope-many of the economists seemed optimistic that the government's bailout plan, which includes buying toxic mortgage debt, will lead to housing's recovery. More affordable prices, pent-up demand, incentives on new homes, fewer housing starts and expected declines in interest rates for fixed-rate mortgages also should help ease the crisis.

Although economist agree that we are in a recession-despite lack of official government confirmation-and have been for many months, several characterized the current financial turmoil as an overreaction, given the country's narrowing trade gap and strengthening the dollar.

But even if the stock market bounces back, don't expect housing to rally right away. The forecasters pointed out numerous factors that are likely to drag out housing's convalescence: Unemployment is currently at 6.1%, compared with 4.4% last year, and it is projected by some to reach 8% next year. Home prices have already tumbled 20% from their peak three years ago, and will probably sink another 10% before stabilizing. Some 12 million homeowners currently owe more on their mortgages than the houses are worth, meaning more foreclosures and a drop in the already-weakening homeownership rate. And bloated supply will continue to outpace demand in most parts of the country for another year or two.

As terrible as this is for people who have lost or will lose their homes, overall, this painful contraction is necessary-a counterbalance to the era of easy money and over-leveraging. When it is over, homes won't be worth as much as they were before, but their prices will be more in line with people's incomes. Loans won't be given to everyone with a pulse, but they will be available to people with good credit. The market will be back to normal.

Perhaps by then we'll have learned some lessons: Just because someone is offering to loan you money doesn't mean you should take it. Don't assume lenders and regulators will look after your interests. Before you sign a contract, read the fine print. Since neither job security nor rising equity is guaranteed, stick with fixed-rate loans. Don't live beyond your means. Pay your bills on time, and keep enough cash on hand to pay for at least six months of expenses. Think of your house primarily as shelter, not a cash machine.

And finally, don't despair. Remember that markets are cyclical; the bigger the binge, the worse the hangover. We'll have to suffer this one for months or even years to come. But if we learn not to over-indulge, we'll all wind up healthier in the long run.

~Alicia Lagarde Craig