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Monday, June 20, 2011

Home Prices May Drop Below 'Fair Value' Without Bank Credit

Economists are beginning to notice how banks' tight lending for mortgages imperils the housing market and promises further price declines.

I was among the first to point out in February 2010 how the inability to finance home purchases would virtually guarantee price declines.  Now a housing economist at Berkeley, Kennethh Rosen, confirms my earlier hypothesis, and is now quoted as saying that "We're not going to get a recovery in housing until the average borrower can get a mortgage."

Very simply, the lack of available credit reduces the ability to borrow and caps purchasing power. (It also makes a mockery of the record-low mortgage rates, which are meaningless if there's no credit.) Combine this factor with the proposal to require minimum down payments equal to 20% of the purchase price and you have two serious constraints on purchasing power.  Add in the general recession, wage stagnation, effective inflation and numerous other real estate-specific factors like the glut of unsold units, overhang of properties waiting to be put up for sale, and the clogged foreclosure pipeline, and it is too easy to see a perfect storm for a new housing price plunge.

Eric Dixon is a New York lawyer, strategic analyst and business consultant who has been following the real estate market over the last decade. 

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