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Is it really all doom and gloom in the U.S. housing sector?

In our latest quarterly survey of U.S. bank risk professionals, respondents offered an outright dismal picture of the housing sector.

When asked if U.S. housing prices would climb back to 2007 levels before the year 2020, 49 percent of respondents said no.  By comparison, only 21 percent said yes.  And if that’s not depressing enough, the negative sentiment extended beyond property values.  Among bankers surveyed, 73 percent believed mortgage defaults would remain elevated for at least five more years.

The negative sentiment wasn’t limited to the long-term outlook.  In our survey, 46 percent of respondents expected mortgage delinquencies to increase over the next six months, and only 15 percent of respondents believed mortgage delinquencies would decline during that period. 

We all know housing has been an enormous drag on the economy.  U.S. households have lost trillions of dollars in equity.  What we don’t know is when the pain of a wobbly real estate market will finally subside.  This week’s Case-Shiller Index showed that home prices have risen in four consecutive months, but prices are still down from last year and are widely predicted to fall after the summer buying season concludes.

Have we finally hit rock bottom?  That’s hard to say, but according to our survey, it’ll be quite some time before prices fully recover. The fact is that the market needs help to clear the backlog of distressed properties.  We are in no man’s land right now. Something bold has to happen – either an acceleration of foreclosures that will force prices down to clear the market, or the adoption of aggressive policies that encourage the resetting of loan terms, such as the proposed expansion of the number of homeowners that qualify for refinancing.

While the former is the simple economic answer, I suspect that the implications of such an approach are not something any politician will take on.  Extending refinancing opportunities to a bigger group of homeowners would enable more families to benefit from historically low interest rates, inject additional consumer expenditures into a depressed economy, and make people feel better about their real estate investments.  I’m guessing only politics stands in the way of making it happen!

Until the real estate market truly stabilizes, it will continue to undercut consumer credit health and household spending.

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