Goldman Sachs Sees ‘False Housing Bottom’ Ahead

With a real estate market already devastated by price deterioration, comes word that the stabilization in U.S. home prices won’t last and that the government’s intervention in the sector may have created a false bottom, according to economists at Goldman Sachs (GS).

[Bloomberg]”The risk of renewed home price declines remains significant,” Alec Phillips, an economist based in Goldman’s Washington office, said in an Oct. 23 note to clients. “Our working assumption is a further 5%to 10% decline by mid-2010….If this estimate is correct, it suggests that most of the increase in home prices since this spring….has been due to temporary factors.”

The government’s interventions in the housing market, including the $8,000 first-time buyer tax credit, foreclosure moratoria, and Fed purchases of mortgage-backed securities (the Fed has bought more than $1 trillion worth of housing debt), qualify as ‘temporary factors’ which have, based on Goldman’s report, pushed home prices 5% higher on a national average than they would have been otherwise.

The main question now is how much influence these programs have had in the housing market, and what happens after they expire. Having said that, if everything is artificial, such as artificially depressed supply through government and bank-specific foreclosure moratoria ; the drive to modify mortgage terms ; and artificially low rates, it is only logical to conclude that so should be the bottom that comes out of it. If the recovery turns out to be phony, even at 5%, will not only further prolong the agony and  postpone the recovery process, but will also bring into action the law of unintended consequences.

It seems we are still in a downtrend no matter what the govt. says.

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