Are Home Values Going to Go Down More?

Are Home Values Going to Go Down More?

With home values going down for the past couple years, severely in some areas, many investors are starting to jump into the investing arena again and snatch up great deals.  It is undeniable that there are great deals right now in most markets, but the question I get all the time is, "Are home values going to go down more?"

That's a difficult question to answer, and as with any attempt at predicting the future, it can be frustrating.  However, there are many factors in play that give me concern that we are not out of the woods yet, and could see a further decline in values in many markets.  That being said, finding the right properties for either a buy and hold strategy or a short term fix and flip is the same philosophy that has always held true in any market- buy them right, and you can profit.

So why the glum outlook for future home values going down, you ask?

First of all, there are two key government programs that are coming to a halt very soon- the home buyer tax credit (June 30th) and the government mortgage-backed security purchase program (March 31st).  There have been whispers of an extension on one or both programs, but how realistic is that?  Can the government continue to print money for stimulus programs and expect inflation to remain tame?  I think not.  More on inflation later.

The end of these programs could have a big effect on the housing market and lead to home values going down.  The home buyer tax credit is wthtout a doubt motivating some home buyers to make a purchase right now.  I talk to consumers every day who are eager to buy ASAP in order to take advantage of this program.  The end of the tax credit will take some buyers out of the market.

When the mortgage-backed security program ends in March, mortgage rates are almost certain to rise.  How severely is impossible to know, but much of the reason rates are still at historic lows right now is because of this program.  

The other factor at play is inflation.  Many FOMC officials have expressed concern over future inflation.  Inflation is the arch-enemy of long term investment such as mortgage-backed securities, and as inflation comes back, mortgage rates will go up.  We saw the same effect in the late 1970's and early 1980's when inflation was so bad.  

Higher rates will equal fewer buyers who can afford a home, and fewer buyers means that buy simple supply and demand, home values are going down.  If rates get really ugly, we could see a vapor-lock in the housing industry which would put stress on the fragile housing recovery that we are starting to see.

It seems to be inevitable that home values are going to go down more.  I hope that I'm wrong.

Colorado Mortgage Blog