Goldman Sachs (NYSE:GS) Economist Says Home Prices Could Plunge 10% in 2010

Several economists at Goldman Sachs (NYSE:GS) say that home prices in 2010 could plunge by up to 10 percent by mid-2010, and over the next several years will appreciate little, if any.

“The risk of renewed home price declines remains significant,” said Goldman economist Alec Phillips recently, in a note to clients. “Our working assumption is a further 5 percent to 10 percent decline by mid-2010.”

“We should expect subdued home price appreciation over the next few years,” also wrote Merrill Lynch’s Ethan Harris and Drew Matus.

This is of course devastating news if prices indeed drop that much and home-appreciation remains flat for several years, as consumers will have no part to play in the buying of goods, generating the question of where the growth projected by so many will come from.
Home owners have been using their homes for years as piggy banks to refinance and buy consumer goods. With home prices not expected to rise for years, there will be very little of that activity to influence the American or global economy.

So economic growth in the U.S. seems to have pinned its hopes on the manufacturing sector, based on the artificially low interest rates induced by the Federal Reserve. The government hopes this will generate more export sales because of those low interest rates and the weak U.S. dollar; a fairly dubious strategy at best.

Economists say that government interference in the market has slowed down the housing disaster, but also question if that is sustainable once the artificial gimmicks are lifted, such as a foreclosure moratoria, Federal Reserve acquisitions of mortgage-back securities, and the $8,000 tax credit for first-time buyers.

These measures are credited with keeping approximately 450,000 foreclosures from coming to the market, along with increasing home sales by close to 200,000.

“Taken together, these moves might have added 5 percent to home prices nationally,” Goldman’s Alec Phillips said in his note. “If this estimate is correct, it suggests that most of the increase in home prices since this spring — which has totaled between 2 percent and 4 percent in seasonally adjusted terms — has been due to temporary factors.”

Merrill’s Harris and Matus differ, saying home prices have rebounded primarily because buyers looking for homes believe the home prices market has bottomed out.

The problem with that view is not knowing what the circumstances would have been without government interference in the markets. Now to assert it’s the bottoming out of home prices which is driving home sales is an assertion that can’t be proven, while what can be proven is the effects of government policies, as mentioned in the numbers above.

Either way, assuming the prices of homes will drop and/or remain flat for at least several years, is another factor which seriously challenges the idea that we are in economic recovery.