The housing market will crash again.  There are simply too many vacant and at-risk houses and not enough buyers.  The math is simple.

The housing market is currently being supported (inflated) by homebuyer tax credits of up to $8000 and the Fed's $1.5 trillion MBS purchase program, which keeps mortgage interest rates at historically low levels.  These programs are scheduled to end by March or April, although interest rates will probably remain low as the Fed retains its Zero Interest Rate Policy (ZIRP).  But the pipeline of prospective homebuyers is being squeezed out.  Under these market conditions, anyone who is even thinking about buying a house has done so, or will do so by April, or has decided to hold off for a few years.  As a result, there will be few homebuyers after April.  The housing market will tank.

This is a matter of simple math. There are currently 6 - 7 million excess housing units in the country, about half of which are vacant,  and the other half of which are behind on payments or at risk of foreclosure.  So let's say there are 4.5 million available units.

The population has been growing by about 3 million people a year in recent years.  However, about 1 million of that is immigration (legal and illegal), and much of that has been stemmed because of the downturn.  Assuming an average household size of 3 people, it will require 666,000 new houses per year to meet the demand.  With 4.5 available units, it will take 6.7 years to sop up supply.

The situation is worse than that, because new construction will increase the supply.  In 2009, over 500,000 new homes were built, and homebuilders will continue to compete with cheaper foreclosed properties using incentives such as warranties and upgrades.  New homes can accommodate most of the natural increase in homebuyers, maintaining the glut.  It would not be surprising for homebuilders to get bailouts or favorable tax treatment in light of the fact that the industry is threatened.

Several more factors aggravate the situation.  The main problem is a 10% vacancy rate in rental properties, which can supply another 4 million units.  Rental units are particularly attractive because they provide greater flexibility for an uncertain workforce.  If the recession continues, more people will be laid off and will foreclose, and will be forced into rental units due to impaired credit.  Then housing prices will fall further, and many people will simply walk away from underwater mortgages in a 'strategic default'.  Because standards have been tightened, lenders will not be able to scrape the bottom of the barrel for poor credit homebuyers as they have in the past. Mortgage interest rates will tick up slightly after the Fed ends its MBS asset purchase program.  Finally, in a stressful and uncertain market, families will consolidate.  We will see the return of 3 generation households.

According to Fannie Mae chief economist Doug Duncan at a recent conference, "All this supply has to be worked off" and "we don't believe the decline in home prices is over yet."  Duncan projects that the excess supply will remain until the start of 2013, but this is probably a serious underestimate.

Housing is unlike other investments.  You can own several cars and TVs, and lots of stocks, but you only need one house.  The market is inelastic.  The administration's attempt to 'stabilize' it will fail.  But that will not stop them from trying.  According to Timothy Geithner in a Treasury press release from October 2009, several new policies such as the extension of the homebuyer tax credit "will help support our efforts to stabilize the housing market by providing support for the recovery in housing prices, keeping mortgage rates low, and helping people who can afford their homes to avoid foreclosure."  He's like the little dutch boy who sticks his finger in the dike, but does he know that it's about to burst?

Due to all these factors, house prices will fall well below historical market levels.  It will be a great time to buy if you really need a house, but not as an investment since rents will be low.  This environment will last for several years as the demand for housing slowly increases and the oversupply is bought off.

The foreclosure rate will increase and families will face renewed challenges.  But the worst part is that the decrease in home prices will go right onto the government's balance sheet.   Currently the Federal government owns or insures 90% of new mortgages.  Many of these, like FHA mortgages, require only 3.5% downpayment, so speculative defaults are likely.  This will add trillions to the national debt, to be paid for by future generations.  Our country has experienced several asset bubbles in the past - stock market crashes of 1929 and 1987, and the tech stock crash in 2000.  This is the first time that government money guaranteed the losses of the gamblers.

Banks loaded up with mortgage-backed toxic assets may finally have to admit insolvency.  Let's hope the government will finally allow the zombies to fail, even though the cost to the taxpayer will be enormous.  Only then can a sound economic base be established for future growth.

For more information:

Fannie Mae economist Duncan - http://www.nasdaq.com/aspx/stock-market-news-story.aspx?storyid=201001261100dowjonesdjonline000312&title=fannie-mae-economist-us-home-price-decline-not-over-yet

Population growth - http://en.wikipedia.org/wiki/Demographics_of_the_United_States#Population_projections

Wall Street Journal on immigration - http://online.wsj.com/article/SB122213015990965589.html

Housing starts 2009 - http://www.census.gov/const/newresconst.pdf

Housing outlook & vacancy rates - http://www.jchs.harvard.edu/publications/markets/son2009/son2009.pdf, http://www.jchs.harvard.edu/publications/rental/rh08_americas_rental_housing/rh08_fact_sheet.pdf

Geithner on the homebuyer tax credit: http://www.treas.gov/press/releases/tg336.htm