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Op-Ed: Eight Reasons Housing Could Rally

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Any rebound could have an electrifying loopback effect on financial markets.

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Editor's Note: James Kostohryz was formerly the head of international investments for a major Brazilian investment bank.

A rebound in housing?

It's possible, and the consequences could be explosive.

I agree with James Quinn (see Op-Ed: The Real Housing Crisis Has Yet to Begin) that working through this housing/mortgage mess will take a very long time. The supply overhang is enormous, unemployment will continue to rise and household incomes are falling.

However, it's perhaps useful to remind oneself that in a bear market, prices rarely go down in an uninterrupted straight line.

I wouldn't discount the possibility that a rebound in the stock market (such as the one I've been forecasting - see Op-Ed: Is Countertrend Rally Inevitable?), and more upbeat expectations about the economy in general, could produce a short-term rebound in housing prices -- especially in some of the most hard-hit markets, like Miami -- driven by people rushing in to "buy at the bottom" and catch "the opportunity of a lifetime."

I believe all of the psychological and financial elements are in place for such a short-term rally to take place.

Psychologically, these factors should be taken into account:

1.
Many people will feel that houses and condos, which in some of the hardest hit markets are more than 50% below pre-crisis levels, are at unbelievable bargain prices.

2. With the media abuzz with reports that the economy is bottoming, and in the face of a rising stock market, anxiety is likely to build that this could be the "last chance" to purchase housing at "historic" bargain prices. Furthermore, realtors will certainly be sure to promote this anxiety among their clients.

Financial factors include:

3. We must recognize a critical fact: Incomes are falling due to unemployment; but real-estate values are falling much faster. Therefore, relative to income, to most potential home buyers, prices "feel" as low as they've ever been in their adult lifetimes.

4. Let's not forget that 91% of American households still have a job. In fact, only about 5-6% of the total number of Americans that were working before the crisis are now out of a job.

5. We must recall that contrary to popular belief, it's actually a minority of American households that have debt problems: 30% of all American households have no debt whatsoever. Another 40% have debt levels well within the range of what's considered prudential. Thus, contrary to popular belief, there are plenty of potential buyers out there.

6. Some of the hardest hit markets are in areas where foreign investors can step in. Let's not forget that despite the rises in the past decade, US real-estate values remain extremely cheap, relative to similar properties in Europe, parts of Asia, and some oil-producing countries in the Middle East.

7. Cash levels in money-market funds and savings accounts are at all-time highs. There's a great deal of cash out there ready to be invested, and many people are trying to figure out how they're going to put it to work.

8. Interest rates are at record lows, and as liquidity returns to the financial system, credit availability is expanding. The credit-worthy folks described above that are anxious to "get in on a good deal" will be able to get financing.

A rebound in housing prices -- even if it ultimately proves to be speculative and short-lived -- could have an absolutely electric loopback effect on financial markets.

For if this occurs, it will be hailed as the strongest piece of evidence yet that the economic crisis is indeed over.
No positions in stocks mentioned.

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