In the last year, M3 has been growing by approximately 15%. This is a basic measure of money supply and liquidity—and this is huge. While the focus has been on the Federal Reserve and how much they will/would drop interest rates to help the real estate market and general economy—what’s been going on behind the scenes speaks volumes. They are increasing the money supply at an enormous rate to stabilize the housing market throughout the USA. It is important to note that interest rates certainly have not been high—it has been a major problem that banks have stopped lending, tightening terms, etc.

I suspect mortgages will be in the 5-5.5% range in the spring—and this–along with the lower prices—should finally put the floor under prices. As this occurs–the risk premium will dissipate, interest rates on mortgages will become cheaper—and housing will begin its normal recovery. There is no question that the Fed is doing everything they can to stabilize the housing markets—and once they turn up ever so slightly—you can expect lower rates as the risk premiums dissipate.

While housing fundamentals are certainly improving—they will continue to do so against the backdrop of continued price declines. This is simply the opposite part of the cycle—remember when housing prices soared even though rates were going higher and inventory was growing? at THAT time—prices increased DESPITE declining fundamentals.

Inventory has been declining now for 3 months—and this is extremely important. This, along with lower interest rates, are the fundamentals that will eventually bring the supply and demand into balance. At some point—due to a drastic reduction in new homes started over the past 2 years—will result in higher prices for real estate as inventory will continue to shrink and shrink—-and let’s not forget—we basically have 3 years of pent-up demand by home buyers.

Combining all of this with expected government action to hold off foreclosures, could bring the real estate market back a lot sooner than most expect.