This article discusses the future of prices in the housing market and whether now is the right time to buy.

With mortgage rates and housing prices fallen to figures not seen since the turn of the century, one question is being asked: is now the time to buy?

With the end of the Federal Reserve’s (Fed’s) subsidy of the mortgage market interest rates scheduled for April 1, 2010, economists predict an increase in mortgage rate commitments beginning March 2010. Currently, rates are hovering around 5%, but are expected to rise by 0.5%, hitting 5.5% or higher by mid-year.  Foreclosure sales and real estate owned (REO) properties are also on track to spike by summer. They will flood the real estate market with inventory, driving current prices even lower.

Real estate prices are not determined simply by the availability of properties listed for sale. The home-buying population’s purchasing power, limited to 31% of a prospective homebuyer’s income, is directly related to his employment. In California, 2.5 to 3 million people remain jobless. To date nearly 1.7 million jobs have disappeared since the peak of employment in December 2007. Losses are still unabated as of January 2010, rendering California’s population unable to take advantage of the selection, prices and mortgage rates available to them. After one year of personal financial confusion, confidence is dropping as the California population is unable to sense any satisfactory resolution for this chaos. They have not learned to appreciate the accomplishments and efforts that the government, the lender and employer of last resort, has brought the nation since the 2008 collapse of private lenders and businesses. This attitude means prices will continue to fall, as our increasingly saturated multiple listing service (MLS) inventories fail to be quickly absorbed by prospective homeowners.

Prepare for a perfect storm in the second half of 2010, composed of the swift and powerful surge of REO resales, increasing housing construction starts, rising mortgage rates, more stringent Frederal Housing Administration (FHA) downpayment requirements, a vanishing crowd of speculators, very few additional jobs, a loss of consumer willingness to borrow and buy as politicians argue over our future and the expiration of the federal down payment subsidy. [For more information on the nation’s loss of jobs, see first tuesday’s Market Chart Jobs Move Real Estate.]

So while the supply of available homes is increasing, sales will remain flat or even drop if the employment problem of a jobless recovery is not remedied by a massive amount of employment provided or subsidized by the government. On the positive side, Congress is at last appearing to have figured this out, albeit one year late.

Another consideration to keep in mind is that while the last home purchase subsidy, which took place in 1975, promptly reduced lender REO and builder home inventory, adverse market consequences for homebuyers began to appear. Congress had approved of the subsidy by the time the market was actually correcting itself. Thus, the government subsidy gave too much momentum to home sales and only helped draw in speculators.

The current 2009-2010 subsidy will generate adverse consequences of a somewhat different nature. During the previous subsidy, speculators flooded into a market of a limited supply of REO’s, whereas today the REO supply is far too abundant. Speculators had their way with the market in mid-2008 and 2009, but despite the extended and expanded government subsidies the continued overabundance of REO supply and the decline in actual homebuyers has had a decaying effect on the market since October 2009. This decay occurred regardless of speculators making up 40% of the January 2010 sales, proving to be of little use to either the speculator or the homebuyer.

Unlike in the late 1970s, there is no comparable pig-in-a-python entry of the boomers as first time homebuyers. This RE recovery must cope with a severely damaged job market among all levels of employers (except health, education, and government), and a dearth of first-time homebuyers.

So, is now the time to buy?

For the time being, there is no urgency to “Buy Now!” given the facts and trends we have before us. Home sales will most likely be limited to needy homebuyers and a few risk-tolerant long-term investors. Beware the increase in mortgage rates as they will axiomatically be followed by a matching decrease in housing prices – the amount each ready and willing homebuyer is able to borrow declines as mortgage rates increase, and only the seller can absorb the amount of the decline if the market is to maintain sales volume.

We will again be asking ourselves this same question at the end of the summer, contemplating whether it is the best time to make a purchase. By Fall 2010, housing prices will have likely sunk closer to the fabled bottom as property values take hits from both the abundant supply and the Fed’s need to withdraw the money they have pumped into the void present in all financial markets – including real estate. [For more information regarding the impacts of the Fed’s subsidizing on interest rates, see the December 2009 first tuesday article, Higher interest rates likely by March.]

Re:  “Housing’s Crystal Ball,” from the New York Times