Will The Real Estate Market Continue To Improve?

By: Rick Smith
Submitted: 06:49PM on Thursday 03 December 2009

The real estate market is improving in some areas of the country. Has the industry finally reached the bottom, and will real estate sales continue to rebound, or is that being too optimistic?

Government intervention has provided support for the real estate market by helping to prevent an escalation of foreclosures, bank failures, and home price declines, but, a question lingers over the future of real estate when these market supports are removed.

Interest rates have been kept artificially low by a commitment from the Federal Reserve to buy mortgage-backed securities. Once the Fed ends this program, rates are expected to rise .5% or more in order to attract investors, and higher rates could reduce the pool of qualified real estate buyers.

The home buyer tax credit is an effective subsidy carrot for stimulating home sales. There is little doubt that real estate demand has been lifted by this program, which was recently extended and expanded to include certain previous homeowners, in addition to first time home buyers. The tax credit, however, creates an artificial demand for real estate, and the market may lose momentum after it expires.

Subsidized loan modifications appear to be successful at keeping thousands of real estate foreclosures off the market, however, a substantial number of these loans are re-defaulting, which prolongs the foreclosure process. When this program ends, will there be downward pressure on home prices as banks sell their distressed home inventory?

Are there major changes ahead regarding the money being funneled to Fannie Mae and Freddie Mac to compensate for huge mortgage default losses? Now, there is also a good chance that FHA will need billions in bail out money.

Real estate accounts for a large sector of our economy, and financial subsidies are buying time in the hope that investor and consumer confidence will soon recover, but a question remains about the market without government support.