Home Prices: Stabilizing or Rising?

The trillion-dollar question on every economist's mind is whether or not housing prices are going up or coming down. Many experts believe that home prices are seeking their bedrock bottom level, but that prices and home equity valuations won't turn around until at least 2010.

Mortgage rates have fallen to their lowest level in at least half a century, and the likelihood is strong that the new Obama administration will aggressively attack the foreclosure crisis by directing more financial aid to homeowners. That means that home prices-which have been in a steady state of decline-may finally begin to stabilize. But whether there'll be enough momentum to contribute to an actual rise in home equity is a huge unknown factor, and even the best economic minds on the planet don't have a reliable crystal ball to know that information.

Home equity and credit

One major factor, however, is credit. It was, after all, easy money from banks and mortgage lenders that caused the rapid rise in home prices at the beginning of the 21st century. Homeowners took advantage of aggressive offers from lenders to tap their home equity in a variety of loan products, and the rush to enjoy overnight wealth pushed housing prices even higher as the frenzy continued. But the artificially induced highs weren't sustainable, and now homeowners and investors would be happy just to have the reassurance of basic stability, as opposed to this ongoing disappointment of continual home equity and housing price deterioration.

Refinancing a savior

The optimistic scenario is that recent action by the Treasury and Federal Reserve to pump money into the credit pipeline could-and should-eventually pay off and inspire a boom in refinancing. If that happens, it can be interpreted as the first sign that the markets are recovering. The way out of most of the housing market problems is through refinance, and agencies including the FHA and FDIC are energetically focused on making them possible. Applications for mortgage refinances have already spiked, and mortgage applications are now at a five-year high. But until homeowners who are already burdened by expensive loans get the chance to shift away from them and into attractive and affordable lower interest-rate loans, the foreclosures will continue to undermine housing prices.

Home prices to stabilize?

The next step needed for full recovery is, of course, home buying. The Mortgage Bankers Association (MBA) said that its seasonally adjusted index of mortgage applications recently soared nearly 50 percent. While that makes it sound like buyers are rushing back into the marketplace, it's tempered by the fact that the MBA counts all applications-even the ones that will ultimately get rejected. It will take some time to process the facts to find out if mortgages are actually happening and causing sales growth.

The big question is what will happen with the overall economy?  We'll have to stay tuned for an answer to that one until later in the year.