Housing sees an uptick: should we rejoice?

The boom and bust in the housing market has been the trigger for throwing the world economy in recession. Many pundits believe that for the economy to recover, the housing market should first stabilize. Of late, there are signs that the housing market might be seeing a turnaround. It there a cause for celebration?

In the UK, the Nationwide Building Society reported the first monthly rise in house prices since October 2007. Housing prices which have fallen 17.6% since the start of the crisis, actually rose 0.9% in March!

In the US, the housing prices were down 29% from their peak with home sales going down steadily. However, in February, home sales rose unexpectedly. In Nevada, which with California, Florida, and Arizona was the epicenter of the boom and bust, fourth quarter sales were more than double their level a year earlier.

So what are the causes for this turnaround in the housing sector? One reason is that the house prices have gone down substantially, which makes it a good opportunity for bargain hunters. However, the bigger cause is that interest rates are at an all time low. The government interest rates in the US and UK are as low as 0 - 0.5%! In other parts of the world, interest rates are at or near historic lows. The low rate of interest is making a lot of people jump into the housing market. This includes first time buyers also. However, the only lesson we learn from history is that we do not learn from history.

Just because interest rates are low now, it doesn’t mean they will be low in a few years time. This was the exact same mistake made by house buyers in the US in 2003-05. When interest rates dropped from a high of 6.5% in 2000 to 1% in 2003, many people bought houses using loans. But when interest rates rose again to more than 5% in 2006, many people found out that they could no longer afford to make the monthly payments on their home loans. This lead to defaults and foreclosures, eventually leading to a global crisis.

As the economy recovers in the next couple of years, interest rates will invariably go up from the current historic lows (to counter inflation). People who are buying houses now, must be sure they can afford their house loans even if the cost rises significantly. It is not clear that people are thinking about that.