When Will Housing Prices Stop Falling?

By Author: Lawrence Roberts
Total Articles: 4762
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House prices became very elevated relative to fundamentals of income and rent. Since these fundamentals underpin the housing market, prices will continue to fall until they come into alignment with historic norms.

The ratio of house prices relative to incomes rose considerably during the Great Housing Bubble. Some of this increase was due to lower interest rates, but in bubble markets most was due to supply constraints, regulatory delays, deteriorating credit underwriting standards, and irrational exuberance and the belief that prices were going to rise forever. People stretched to buy real estate as evidenced by the increasing debt service burdens they took on during this time. The rally reached affordability limits where buyers could not push prices any higher. Once these limits were reached, lenders were forced come up with new programs allowing borrowers to take on even more debt to push prices higher, or the rally was going to end. Once prices stopped rising, people lost their incentive to buy and ultimately prices began a decline. This decline is expected to continue unabated until prices fall back to fundamental ...
... valuations, or perhaps even lower.

Credit availability moves in cycles. During the Great Housing Bubble, credit was loosened to a degree not seen before, and it facilitated a price bubble of epic proportions. During periods of credit contraction, lenders seek to avoid risk and they make fewer loans. This causes inflated asset prices to drop precipitously. This cycle of credit contraction leading to asset deflation feeds on itself until lending standards become too tight and overly cautious when asset prices are their lowest. Of course, this is when credit should be made available to purchase assets at bargain prices. As safety and sanity returns to a financial market, lenders realize that they became too conservative and loosen their standards allowing more money to flow into capital markets; the whole process repeats, and the credit cycle continues.
About Author:
Lawrence Roberts is the author of The Great Housing Bubble: Why Did House Prices Fall?
Learn more and get FREE eBooks at: http://www.thegreathousingbubble.com/
Read the author's daily dispatches at The Irvine Housing Blog: http://www.irvinehousingblog.com/ Visit When Will Housing Prices Stop Falling?.