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Will There Be a ‘Double Dip’ in Real Estate?

The biggest question looming over the economy overall and real estate specifically is whether or not we will experience a double dip. What exactly is a double dip? Robert Hall, chairman of the National Bureau of Economic Research, a group of academic economists that officially declares the starts and ends of recessions, says:

“A double dip is akin to a continuous recession that’s punctuated by a period of growth, then followed by a further decline in the economy.”

We’ve had a recession followed by a period of growth. Are we headed for further decline in the economy? We’ll leave discussion of the overall economy to others.

We want to tackle what a double dip could mean to the real estate industry. Are we in store for another dramatic drop in housing values? As seems to be the case in every area of real estate today, there is no consensus.  We’ll give you both arguments.

Best Case Scenario

Reuters, in an article last week titled Housing Market to Skirt Another Big Downturn, shared the results of a poll that showed:

The housing market should skirt another major downturn, even though stubbornly high unemployment and foreclosures will curb demand and keep home prices mostly flat through 2011.

Home properties in the 20 biggest U.S. metro areas could end up with a tiny rise in value this year despite government tax credits to homebuyers ending more than three months ago.

But with a slowing recovery and tight lending standards, most economists predicted it could take at least five years for average home prices to revisit their 2006 peaks prior to the worst housing crash since the 1930s Great Depression.

Even a ‘tiny’ increase in home values suggests that a double dip will not occur. That would bring relief to most homeowners and real estate professionals. Now, let’s look at the other side of the argument.

Worst Case Scenario

The Wall Street Journal on the day before the above mentioned article also reported on the chances of a double dip in housing. Their article, Moody’s: Odds of a Double Dip Increasing, Prices Could Fall 20% paints quite a different picture.

If the U.S. enters a double-dip recession, home prices could fall by another 20% before they stabilize in early 2012, according to a new forecast by Moody’s Analytics.

That compares to the baseline forecast that calls for another 5% decline with prices hitting bottom early next year. Housing economist Celia Chen writes that the odds of a near-term double-dip recession now stand near one in four, versus odds of one in five during the spring.

Ms. Chen writes that foreclosures, and the lack of success of loan modifications, remain one of the biggest risks to housing, “with another vicious spiral downward a possibility.”

In the actual Moody’s report mentioned in the WSJ article, they advise investors that one of two scenarios could play out. Here is the graph of Moody’s two possible outcomes:

Two Possible Scenarios

They are calling for either a 5% or 20% fall in prices with a 25% chance of the more dramatic reduction.

Robert Shiller, The Yale University professor and leading expert on the current real estate market thinks the chances of a double dip in the economy may be even higher. In a Market Watch News Break last week, he claimed the odds were 50-50 unless the jobs picture changes.

What does this mean to you?

If you are thinking of selling anytime in the near future, we think the risk in waiting (a possible vicious spiral downward’ in prices) is not worth the possible reward (a tiny’ rise in value of your home).


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3 replies
  1. Roe
    Roe says:

    I do not believe there will be a Double Dip in Real Estate per say!

    This is the senario I believe will happen.

    Sellers currently still believe their house is worth more then it is and there r still Realtors out there who will Over Price the Home for them “Just to get the Listing” . As these Sellers HAVE to sell there home ..do to..out growing the size of the house… Job loss..age ..or relocation…they will price the home to where it should have been to begin with. Then it will sell. This will cause the drop in home prices and the leveling will start to occur..

    The economy is what it is and what it is going to be for a long time to come and people r now adjusting to it by making the necessary changes in their lives.

    Reply
  2. Susan
    Susan says:

    I agree with everything mentioned above and would also add that shadow inventory has not had it’s full effect on the market. The effect being a higher downturn in prices.

    Reply

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  1. […] looked at what certain experts were predicting about a possible double dip in housing yesterday. Today, we have compiled the thoughts of five industry players to help show where the […]

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