Top 3 Reasons Why Housing Won’t Recover

When it comes to the housing market, two things get talked about regularly: the bottom and a recovery. However, these two terms mean very different things and don’t occur at the same time.

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Some have predicted that we have yet to see a housing bottom, while others say we may have hit the bottom and a recovery is on the way. It’s possible, however, that a recovery may not occur at all. Let’s take a look at why this may be the case.
Housing Bottom vs. Housing Recovery

If you’re not certain about the difference between a housing bottom and housing recovery, here is a quick explanation of the difference. A housing bottom means that housing prices drop until they reach their lowest point. The housing recovery, on the other hand, reflects the period when housing prices begin to bounce back from the bottom.

In general, a housing recovery represents a time when homes begin to regain equity after the loss in the housing bottom. However, considering the way the economy has been moving, it’s possible our housing market may never recover.
3 Reasons Housing May Not Bounce Back

In the wake of the Great Recession, so many people lost their jobs and so many homeowners were forced to foreclose that it has been more difficult than ever to hit a true bottom and even more, begin to recover. Some areas like Las Vegas and parts of California, Michigan and Florida have suffered the most, but the entire country is in danger of never seeing a full recovery. Here are a few reasons why:

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1. We Haven’t Hit the Bottom Yet

Home prices have already dropped 30 percent since they reached their peak in 2006. However, economists say that we have yet to see the bottom. In fact, they think prices may take another tumble this year as we watch foreclosures increase in the market and financial tax credits and record-low mortgage interest rates fall away.

2. Home Prices Aren’t Set to Rebound for Some Time

Ever since the financial and housing crises hit our economy in 2008 and foreclosures skyrocketed due to the worst job losses since the Great Depression, property values have dropped to incredibly low levels and have yet to truly increase. Sure, they’ve rebounded some, but as economists predicted in May, prices won’t really increase until the end of 2014.

3. Many Homes May Stay Underwater

Home values are expected to steadily appreciate at some point, but since some were purchased at such a high level in 2006 or earlier they may never recover from their underwater mortgages.

Currently, 25 percent of homeowners owe more than their home is worth, according to research firm First American CoreLogic. This means that one in every four homes will have to obtain a value that at least matches the level it sat when purchased to stop foreclosures and see a full recovery. This may never occur.

Housing Market Comparable to Japan’s

It turns out that our housing crisis is not unique to the United States. In the 1990s, Japan suffered through what is known as “The Lost Decade” when many borrowers, excited by low interest rates and high land values, took out tons of loans. However, their joy was short-lived after the Finance Ministry sharply increased the rates and caused their bubble to pop, resulting in a debt crisis and bank failures similar to ours.

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Since then, Japan has managed to bounce back, but its recovery has been slow at best. Now that Japan’s economy has slipped to third in the world, it’s possible it never totally recovered, as the U.S. may not either.

Economists suggest that even though mortgage rates are low, in order for U.S. housing to recover, the market cannot simply drive up prices at a rate that’s faster than the rate of inflation. Since a normal market only sees home prices increase 3 to 5 percent a year, moving any faster could result in another housing bubble that could indeed burst.

For the hardest-hit regions, this means that a recovery not only may not occur in some lifetimes, but maybe never at all. Unfortunately, we will probably have to wait many years to see what the real likelihood is of a housing market bounce back.

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