Housing Market Set for 'Double Dip'?


Just when you thought it might be safe to buy that house on the water, a big hedge fund manager says to hold on — six months from now you can get it way cheaper.

Brian Taylor, founder and chief executive officer of hedge fund outfit Pine River, says that the housing market is headed for another downturn. Pine River, which holds $1.6 billion in assets under management, gained 90% in returns last year, mainly by betting against the housing market.

"There are still issues in the housing markets and it would not surprise us to see the recovery turn down," Taylor said, speaking at the Reuters Private Equity and Hedge Fund Summit in New York in early March.

"The amount of risk has never been greater," he also told the New York audience. "Armageddon was avoided in late 2008 and 2009," but the housing sector remains sour, as the number of homeowners that Taylor describes as being underwater on their mortgages struggle to hang on.

Taylor says that the slight uptick in housing prices in the fourth quarter of 2010 was an illusion — artificially buoyed by the $8,000 new homebuyer tax credit. But Uncle Sam can’t support the housing market forever, and Taylor looks for the government’s impact on housing values to decline in 2010.

He’s hardly alone. In a March 16 appearance on CNBC, Meredith Whitney, CEO of Meredith Whitney Advisory group, said that the housing market will “double dip” in 2010. When the government inevitably pulls back on its support for the housing sector, she says the resulting surplus of available homes will lead to reduced home values.

But struggling homeowners might be the real problem for property values. The real estate Web site Zillow.com reports that one in five U.S. homes are underwater, meaning the owners owe more than their homes are worth.

Zillow, too, calls that an “impending” sign of a double dip in housing. Besides the underwater figures, Zillow cites 20% of U.S. metro areas that are experiencing flat or reduced housing values. Any decrease in housing prices of 1% or more over five consecutive months qualifies for double dip status, Zillow reports. And it's not just depressed housing markets like Detroit that face this danger - metro areas like Oklahoma City and Denver are also at risk, according to Zillow.

The news isn’t all bad, though. According to Zillow, hard-hit areas won’t feel as much pain as they did in the first housing downturn. "What we saw in mid-2009 was a brief respite from a larger market correction that has not yet run its course. The good news is that, for those markets that will see a double dip in home values before reaching a definitive bottom, this second dip will not be a return to the magnitude of depreciation seen earlier, but rather will look more like a modest aftershock of the earlier downturn," said Stan Humphries, Zillow's chief economist.

Still, when economists cite “moderate aftershocks” as good news, you know we’re in tough times.

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