Well that title got your attention! First off I want to say if I could predict things well I would have bought Microsoft years ago and be retired now. However, what is in favor of that predication is it is in contrast to the doom and gloom in the press (that is rarely right), but let’s get down to the issues.
Most people see a waive of foreclosures coming that make the first wave look small, and we may get hit by the first part of it before any correction can take place. But consider, there is an enormous amount of social and political pressure to stop the foreclosure nightmare. This pressure is no longer just from the left. I am not a big fan of the current administration, but eventually the President and Tim Geithner will have to throw some mud that finally sticks on this issue.
I am not sure the current refinance plan will work much better than the last one. However, eventually I think the Feds will buy up most of the toxic assets at a discount and there may be some changes in the accounting rules. The loans that are in trouble will be steeply discounted for the original borrower allowing them to stay in their homes. Once the majority foreclosures are headed off prices will level off. There will still be people that need to sell with no equity and others that cannot afford the mortgage still keeping the REO and Short Sale market alive, but with the available supply reduced they can take a harder line and keep the prices higher.
Furthermore once the bad assets are off the books lending may ease up more, creating more of a demand. In fact the demand may far out strip the supply. I think inflation is another worry and the way things are going it may be massive when it gets here. Inflation will also drive housing prices up, but at the same time it will drive interest rates up. The issue then is will housing inflation be negated by higher interest rates.
Inflation may actually be moderated for sometime due to the fact much of the Federal spending is being delayed. The collapse of the credit market has also collapsed the compounded effect of Fractional Banking on the money supply, causing deflation. Eventually for good or for bad the credit markets will come back, which may cause the rapid inflation long after much of the government money is pumped into the economy.
I would not be my life on any of this right now. However, it is important to consider other possibilities. Another factor that makes this hard to predict is the rapid political change going on in this country and the rest of the world right now. This is not my suggested solution to the problem, but is my prediction.
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