Thursday, March 19, 2009

Housing prices always go up, right?

Any long range forecast is inherently flawed because it relies on too many variables to produce an accurate result. However, I found this news from NJ's leading real estate expert interesting...

"Because of job losses, housing will continue to contract,” Otteau told a hotel ballroom full of real estate agents in East Hanover, at his twice-yearly seminar on home prices.

Otteau said home prices may start rising in spring 2010 as the economy recovers, but will increase slowly — around 3 percent a year — in the first few years of the housing market’s rebound. As a result, New Jersey home prices will not return to the peaks reached in 2005 until 2020, he predicted."

So, by this estimate if you bought a home in 2005 in New Jersey, you've only got to wait 11 more years to break even.

I'd offer up a couple of qualifiers - I think interest rates could be much, much higher in 2010-2012 and as a result home affordability will be cut dramatically if this scenario play out. Also, I'm not convinced that there will be any meaningful economic recovery in 2010.

The stock market has mostly yawned at the Fed Reserve's massive new actions to manipulate .... I mean, stabilize the markets. However, I think it's interesting to note the move in Gold since the Fed's announcement yesterday. Gold has soared more than $80/ounce or about 8% since yesterday! This is clearly a sign that the inflation bugs think the Fed's new programs will eventually be inflationary and devalue the US dollar.

I'm not entirely convinced, but I think there is a very real chance that the Fed could be faced with inflation in 2010 and will be unable to react appropriately. If they move rates upward to thwart inflation it will lead to massive spikes in the cost of borrowing for the US government. If they don't move rates up we could be staring at double digit inflation. All of the scenarios are probably under 30% probability right now, but what probability would you have assigned last year to Lehman, AIG, Bear Sterns, Merrill, blowing up and the Dow falling below 8,000?


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