Alan Greenspan: Double Dip in Home Prices Could Lead to New Recession

Alan Greenspan predicts a double dip recessionAlan Greenspan's prognostic opinion over the weekend on NBC's "Meet the Press" that a further drop in home prices could lead to a second or double-dip recession was a rather duh moment in the news of domestic economics.

With a battered and emotionally fragile economy, any negative headline news, like a further decrease in home values, will suppress investor and consumer confidence ... and so goes the economy.

Emotions aside, the future of the housing market looks to be one that dredges a saw-toothed bottom for quite sometime, so if Mr. Greenspan is right ... double-dip recession, the U.S. economy cometh. It's time to prepare everyone's expectations that the housing market isn't set for growth and mitigate the factors that foster such decrease in values.

High unemployment, a perpetual replenishing of shadow inventory, and increasingly stringent mortgage-underwriting standards will suppress any meaningful growth in the housing market for years to come. Addressing these issues are the key to averting the second coming of recession-dom, which I'm not convinced ever ceased in the first place. A series of patchwork fixes don't make for a long-term solution. (See: homebuyer tax credit and massive-yet-unsustainable federal spending.)

As unemployment remains in the 9 percent to 10 percent range, mortgage defaults and the subsequent foreclosures will continue adding to lending institutions' already inflated distressed-property inventories.Defaults due to unemployment transcend loan types; prime borrowers in a 30-year-fixed program, with excellent credit, income and assets (at the time they took out the loan), are going into default right along with those painted exotic and subprime.

This "shadow inventory" -- the ominous name for the non-performing and decaying foreclosed properties that banks are holding on their books, and are yet to be released back into the market -- threatens to suppress prices as an overage of supply permeates the marketplace.There is still an enormous amount of shadow inventory from the Free Mortgage Party or refi boom (circa 2002-2007) that needs to be flushed from the system, in addition to the influx of new inventory due to high unemployment.

Mortgage rates can drop to 0.5 percent, but if only a tiny pool of consumers qualify for a mortgage the underlying rate doesn't matter much.Mortgage underwriting standards are a lynchpin to spurring a housing recovery; currently they are almost as tight as they were loose during the refi boom.Lenders used to find a way to get any deal done; today they look for any way to kill a deal.We can't go back to the days of NINJA (No Income, No Job, No Asset) loans, however some loosening in the underwriting department of lenders must evolve if we hope to push demand and prices upward.

All things considered, bearish is my stance on the housing market and the overall economy as we continue into a
lost decade of growth, be it double-dip recession or whatever economic semantics you use to label this period.

Finally, let's say someone waves their magic wand. Unemployment drops, income rises, people start qualifying for homes -- housing prices rise. With trillions of new greenbacks in circulation and a staggering deficit, we're now staring at hyperinflation, rising interest rates and the accompanying misery which that shall bring. To be an economist? Oy vey.

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