There is no end in sight for the housing market slump, says Alexander Green at InvestmentU.com.

The housing boom of the past few years was caused by cheap credit and tax breaks, not by sound fundamentals. Now, consumer confidence is low, credit is tight, and home inventories are piling up.

Alex says we will only reach the housing bottom when supply and demand come back into balance. And that is a long way off yet…

I’ve disagreed with some of the things that former Fed Chairman Alan Greenspan has said and done over the years.

But what he said last week – that falling home prices in America are “nowhere near the bottom” – you can take to the bank.

This may surprise some, especially since the national media just reported the
single largest year-over-year drop in U.S. home prices, May’s record 15.8% plunge.

But over the past several months, I’ve spent time looking at residential real estate in cities large and small. I’ve been to areas that have held up relatively well, like Dallas, TX and Asheville, NC. And visited places that have been crushed, like Orlando, Las Vegas and Miami. I’ve talked to realtors, appraisers, homebuilders and mortgage brokers. And I’ve come away with one overriding impression: Home sellers still don’t get it.

From 1999 to 2006, we experienced the wildest housing boom in U.S. history. Prices skyrocketed relative to building costs, personal income, population growth and inflation.

In other words, home prices didn’t soar for any sound fundamental reason. They soared because of low interest rates, easy credit and a $500,000 capital gains tax exemption. (Animal spirits, in other words.)

While there have been exceptions in some high-growth areas of the country (like Manhattan and Southern California), homes are ordinarily steady but unspectacular long-term investments. According to Freddie Mac (FRE), U.S. home prices have climbed 6.2% a year over the past 30 years.

To see just how unusual recent price activity has been, take a look at Yale economist Robert Shiller’s inflation-adjusted housing chart, going back more than a century.

As you can see, no one alive today has ever seen anything like the run-up of the past few years. But now the bloom is off the rose.

For starters, the economy is in the tank. That puts fewer consumers in the mood to make a big-ticket purchase. And homes are the biggest of them all.

Then there is the state of the housing market itself. Foreclosures are at record levels. And we will see new records in the months ahead as variable mortgages reset higher and prices drift lower.

Inventory keeps piling up. Nationally, lackluster sales have created an 11-month supply of unsold homes.

Mortgage rates are rising. Two weeks ago, the national average for a 30-year mortgage surpassed 6%, a 52-week high.

Banks and other mortgage lenders have raised their standards, too. In recent years, even borrowers with spotty payment histories were able to choose among a juicy selection of no-money-down, interest only, adjustable rate, negative amortization, “pick-your-payment” mortgages.

But now credit is tight. My brother, a homebuilder, says that even if you can find a buyer, good luck getting to closing. Many buyers either can’t come up with the down payment or fail to qualify for a mortgage under new guidelines. That means homes under contract are routinely coming back onto the market.

In short, it really is ugly out there.

Put all these factors together – a weak economy, declining home prices, higher mortgage rates, tougher lending standards and rising home inventory – and you’d think that home sellers would slash prices.

But they haven’t. At least, not enough. Not yet.

Realtors keep telling me the same story. They are increasingly frustrated with sellers who simply refuse to face the music. (And every week a new batch of listings shows up at “you-must-be-joking” prices.)

No one likes to take a loss, of course, or to realize a smaller gain than anticipated. But understand that potential buyers do not care what we paid for our homes or how much they were “worth at the top.”

The bubble is over. Magical buyers are not going to appear and pay us what we could have gotten three years ago.

Nor, I’ll lay long odds, is the housing market going to “bounce back” anytime soon. (If you think so, please refer back to the Shiller chart.)

I’m not gloating, incidentally. I own two houses myself and they are mired in the same quicksand as yours.

I’m only pointing out that it’s too early to speculate on a rebound. And smart sellers are better off accepting a reasonable offer rather than waiting for a turnaround that is years away.

The national housing market will bottom – and we’ll see the recovery that follows – when supply and demand come back into balance.

And as Greenspan pointed out last week, we’re nowhere near that now.

Source: Real Estate: Why Greenspan Is Right This Time