Housing on Shaky Foundation as Investors Pile In

Sunday, 21 Apr 2013 10:41 AM

By Michael Kling

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With the payroll tax cut over and government spending being cut, the housing recovery is supposed to keep an economic expansion going. After all, home prices are up, sales are increasing, and mortgage rates should stay low.

But some experts worry that the housing market may soon collapse. CNNMoney cited several reasons why housing may falter from housing market experts.

For one thing, investors are supporting rising home prices. "An investor-driven boom is likely to end badly," Dean Baker, co-director of the Center for Economic and Policy Research, told CNNMoney. "I'm worried that some of the big jumps in prices are driven by the same sort of speculation that drove the housing bubble."

Editor's Note: Billionaires Dump Stocks. Prepare for the Unthinkable.

Investors may drop the business when interest rates and prices rise, Baker warns. Rising prices are outpacing rents by a wide margin in some markets, which will demolish investors' return on equity.

In addition, an increasing number of inexperienced "armchair" investors are joining the ranks of institutional players and small but savvy investors, a sign that the recovery is reaching its peak.

The economic recovery isn't strong enough yet to support a stable housing rebound. Only 88,000 new jobs were created in March, the weakest jobs report since last June. Half a million Americans dropped out of the workforce, many who stopped looking for work.

"These days, I worry more about the economy hurting housing than housing hurting the economy," Jared Bernstein, a senior fellow at the Center on Budget and Policy Priorities, told CNNMoney.

Plus, sequestration may hurt housing. The government is cutting $85 billion in its current round of budget cuts. Those cuts combined with the end of the payroll tax cut may recue the GDP by about one percentage point, Bernstein told CNNMoney.

Also, mortgage rates will rise at some point, making homes less affordable. "I'm worried that it's too tough for many people to make the family budget, including the mortgage payment," Bernstein said.

However, Adrian Ponsen, senior real estate economist for the CoStar Group, an information and analytics provider, believes that housing will soon begin making big contributions to a broad-based recovery this year.

If the single-family home vacancy rate keeps falling at its current pace, it should spark healthy levels of new home construction by the end of 2014. "Once the inventory of vacant for-sale homes reaches minimal levels (likely next year), single-family housing construction should rise significantly as homebuilders start playing catch-up," Ponsen wrote in a new report.

Editor's Note: Billionaires Dump Stocks. Prepare for the Unthinkable.

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