We are witnessing the unwinding of one of the greatest financial bubbles of all time. It took many years to build the bubble and it may take many years to deflate it. The government is doing everything it can to prop it up, but is probably only keeping it from collapse and therefore greatly prolonging the pain. Equilibrium will not be reached until prices fall to the point where the number of buyers equals the number of sellers.
The Federal Reserve is keeping interest rates artificially low and Congress keeps voting huge tax incentives for buyers. Both temporarily both boost demand but so far these huge and costly policies have only barely stabilized home prices.
A flood of foreclosures in 2010 will slow the housing recovery. The coming tidal wave has been held back this year, as mortgage companies try to figure out which homes qualify for federal assistance. A growing number of adjustable rate mortgages (ARM’s) will re-adjust in 2010 and 2011. Rate adjustments and high unemployment means that foreclosures and distress sales will continue to put downward pressure on prices as the supply of homes for sale increase.
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