As QE3 comes to a close, home price increases dwindle while real estate lending remains dead and all-cash buyers head for the exits. Homes remain overleveraged, keeping the market of current homeowners tethered down.
What might we expect to see? How about this (HT: CR), from the New York Times: "Indians Join the Wave of Investors in Condos and Homes in the U.S." According to the article, foreign buyers make up 7% of the market for US homes, and the number is up 35% in the past year.
This gives me some hope for the housing market. The quantity of foreign buyers may not be large enough to make up the difference, though. Homes probably need to appreciate at least another 10% to reach normal leverage levels.
I will take this as evidence in favor of my view of housing, in any case.
It may be true that wages have largely readjusted with the passage of time, despite substantial inflation. However, with the zero lower bound, short term commercial investments still have to be funded with above-market interest rates, and homeowners are still living in homes with less equity than they expected to have, funded with mortgages that are being paid back in dollars worth more than they were expected to be worth.
Possibly, the natural short term interest rate is near zero, so that the commercial investment problem has also moderated with the passage of time. But, the problems with home and mortgage values have not been fully solved.
What if our declining Federal deficit is pushing developing world savers from the Treasuries market into the housing market? "Austerity" to the rescue! If only we could have "austerity" and an aggressive central bank.