The housing market: as bad as we think, or worse?

The existing home sales figures released today offer little cause for optimism. Sales fell 2%, and the inventory of unsold homes ticked upwards--there is now enough supply in the housing market to satisfy almost ten month's worth of demand.

A deflationary mindset has entered the market. Buyers are holding out because they think house prices will go even lower, and this is becoming a self-fulfilling prophecy. I've been thinking about buying a house recently, and a number of people have told me that I should wait until it bottoms. Some of them are the same people who back in 2004 were telling me to buy before America ran out of houses.

Trying to time the bottom is a fool's game, and anyway I want to live in the house, not flip it. But as long as most people feel as they do, the housing market will continue to crater.

Indeed, the economists surveyed by the Wall Street Journal suggest that the problem may be even worse than we think, because so many homeowners are holding back from selling until they can get what they think of as a "fair" price--i.e. at least 10% above what they paid for it in 2005. The people who are selling now are the ones who really have to sell, either because they can't meet the mortgage payments or because they have to move to another city. I looked at eight houses last Wednesday, of which two were foreclosures. All of them had been on the market for two months or more. The agent told me about one client who was moving to another city but couldn't sell his condo because he'd have to show up at the closing with a check for $40,000.

Eventually some of those people who are holding onto their houses by their fingernails will have to sell too, into a market where most buyers are demanding super bargains. If you don't have much equity in your house, now would be a good time to tighten the belt and start paying extra on the mortgage.