The economic crisis that began in 2007 was the direct result of a crash in the housing market. Banks approved home loans for unqualified borrowers. When these borrowers were unable to keep up payments, the banks lost billions, leading the U.S. economy and financial system to the brink of collapse.
There is optimism that the worst of the financial crisis is in the past. Employment numbers are improving, stocks are gaining ground, and American consumers are beginning to feel more optimistic about the future. Many economists predict 2012 will be the year the economy turns around and permanently ends the Great Recession.
But does the closing chapter of the Great Recession also signal an end to the housing slump? Since the housing bubble burst, homeowners have seen the value of their house depreciate at record levels. Potential buyers find it hard to secure a home loan. For many, owning a home, once a stalwart of the American economy and a key asset in building wealth, lost its allure.
According to housing experts, a number of factors this year have the potential to turn the housing market around and help it to find its bottom. But even if this does occur and housing prices stabilize, these experts warn that it could be years before housing prices start to rise again.
Obama's plan helpful, but not a cure-all. President Barack Obama recently unveiled a plan that would allow homeowners who have been paying their mortgage on time to refinance loans owned by Fannie Mae, Freddie Mac, the Federal Housing Administration, or a private bank in an effort to reduce monthly payments. He also proposed to allow Fannie and Freddie to sell foreclosed homes to individuals or businesses that plan to rent them out.
"The president's plan regarding the refinancing of underwater mortgages is a great idea," says Lawrence Yun, chief economist at the National Association for Realtors. "Giving them low rates should not be controversial. The homeowner position would be much healthier and it provides an opportunity to build up equity faster."
Obama's plan also addresses the problem created by mass foreclosures over the last five years. Until this backlog of homes is cleared, housing prices will remain depressed as buyers can get a home at a bargain-basement price. Because of this, there is little demand for new homes and few are being built. Allowing businesses and real estate investors to purchase and rent the problems helps to lessen supply of old, cheap homes.
"It's going to be the same case until you deal with the foreclosure problem," says David Min, associate director for financial markets policy at the Center for American Progress. "If you're trying to sell a house, you need to have more buyers and no flood of inventory."
The primary problem with Obama's plan, however, is political. Republicans have already vowed to oppose it, making its chances for passage slim.
Other signs point positive, but long-term recovery elusive. Even if the plan doesn't pass, there are signs that the housing market could be on the mend. According to Stan Humphries, chief economist at Zillow Real Estate Research, 2012 will be a "transitional year" buoyed by positive economic trends that will push the housing market closer to its bottom.
"The real reason for the rebound is market fundamentals. It's going to be a very strong year for new and existing home sales, but also housing starts. The decent growth of the broader economy and progress in terms of job growth is also a positive. We think we're going to stay well above [adding] 100,000 jobs each month. It will make people feel better about the economy."
He says this would also make it easier for consumers to get a home loan. "Lending standards will ease a bit in 2012 because lenders are responsive to what the broader economy is doing, as well as what's happening with home values," he says.