The Case Against Another Housing Collapse in 2011

The road to recovery in 2011 has two speed bumps and one strong crosswind. The domestic, on-road speed bumps in front of the U.S. economy are the weak housing market (read an excellent case for pessimism here) and our money-starved state and local governments (my case for pessimism here).

The crosswinds are coming from across the ocean, where Europe's rolling debt crisis threatens to smack the financial industry and inflate the dollar when we'd prefer a cheap currency to keep our exports competitive.

There is no doubt that states will face major cuts through 2011, even with slowly rising tax revenue. But the housing market's health is an issue ripe for debate. Since it's nearly New Years, I'd prefer to focus on the positive. So here's the Economist's Ryan Avent offering the case for optimism:

If home prices stabilised from May of 2009 to May of 2010 while conditions were highly uncertain, then sank as broader conditions deteriorated, it is somewhat difficult to imagine how they would fall precipitously as conditions brightened to their strongest state since before the recession. Dynamics in housing markets aren't supportive of strong growth. But neither are they worsening. Defaults may have peaked. Total REO inventory is high, but it has been higher. It's easy to imagine continued collapse in some local markets, where supply and demand remain very out of whack. But it's more difficult to see where a national crash might originate.

The most likely candidate is a major policy error. If the Fed reversed policy and began tightening, then prices would surely fall sharply. If the government ceased supporting mortgage markets while the supply overhang continues, then prices would surely fall sharply. But everything we've seen from Washington so far indicates that Republicans, Democrats, and the Federal Reserve are very focused on preventing a major deterioration in home prices.

Read the full story at The Economist.