Obviously no one can say for sure, but there are three factors at play that could put downward pressure on property values in the near term.

1. Supply. Nationwide, lenders are sitting on a backlog of approximately 1 million foreclosed homes.  Under pressure from Uncle Sam, and in the interest of minimizing their own losses, they’ve only been releasing a few at a time.  As a result, the current supply of for-sale homes is incredibly (and artificially) low.  If this huge volume of foreclosures were to somehow break loose and flood the market, prices would fall sharply.

2. Demand. For the past year, the government has been artificially inflating demand with low-down payment loans and generous tax credits.  The tax credit offer expires April 30th.  Without that incentive, demand will drop and prices could fall.  In the car business, this is known as “incentive hangover;” you might sell a lot of cars during “cash for clunkers” or “employee pricing,” but the next few months are going to be rough.  Will they let it expire, or extend it again?

3. The Price of Money.  Interest rates remain near historic lows.  Any increase in interest rate reduces the borrowing power of would-be buyers.  On a $300,000 loan, a 1% increase in interest rate can raise the cost by around $200 per month, which obviously limits how much house potential buyers can afford.  Many so-called experts think that interest rates will rise in the near term, pushing prices lower.  Of course, only cash buyers benefit from an interest-rate-increase-caused price drop.  For everyone else, the sticker price may be lower, but the carrying cost remains the same.

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