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House Prices Plunge: Recovery in 2013?

Breaking news: the housing market still stinks! According to online real estate firm, house prices across the nation fell 3 percent in the first quarter of the year and were down 1 percent in March from February, the 57th consecutive monthly drop. The median house price is now $169,600, DOWN 8.2 percent from a year ago and off nearly 30 percent from the top of the market in 2006.

In the category of "it CAN get worse," Zillow anticipates that prices could slide another 7-9 percent from this point and that the elusive bottom to the housing market will not come until 2012 at the earliest.

I know that everyone wants the housing market to recover sooner than 2012, but let's have a reality check. Home prices doubled between 2000 and 2006, fueled by a massive credit bubble. When the bubble burst, prices dropped in a big way. The government tried to intervene in the housing market, by providing first-time and move-up home buyer tax credits. That was nice while it lasted (the credits expired last June), but the market is reverting to the trend and that trend is down, proving that it really is hard to stop a speeding train.

I recall plenty of times over the past few years when "experts" said the housing recovery was "coming soon". As it turns out, these folks were realtors, not economists. Anyone with even a tiny understand of the market could gather that there was simply too much supply and not enough demand, which meant there was only one way for the market to go: down.

The big explanation for the abundance of homes is the record number of foreclosures in the pipeline. According to Calculated Risk, which I think provides the very BEST analysis on the housing market, there are over 6.33 million loans delinquent or in foreclosure, so the downward pressure on house prices will continue.

On the demand side, there are two big problems: Zillow says that 28.4 percent of single-family homeowners with mortgages were underwater at the end of Q1, meaning they owe more on their mortgages then their homes are worth. That removes nearly 30 percent of would-be, move-up buyers from the market. Additionally, the jobs market may be improving, but its far from robust.

In other words, we can kiss that housing market bottom goodbye, at least for a while. Here's my simple way of looking at the situation: given that it took seven years for the housing market bubble to form and burst; it's likely to take another seven years to claw back. While Zillow says the bottom will come in 2012, I am sticking to my earlier guess of 2013--I just can't resist the 7-year symmetry.

That doesn't mean you should wait around for the bottom, though. If you are a buyer, you are likely trying to purchase a home for a long time, so even if prices drop by another 5-10 percent, so what? If the numbers look right for your family, I would be taking advantage of low mortgage rates and not attempt to buy the rock bottom. Find the right place to live and take the plunge!

Image by Flickr User respres, CC 2.0

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