The Fed jumped in this week to lower the lending rate by .25%. Although this is a good short term fix for those of us paying a mortgage and credit card bills, the long term effect is going to do little to help the ailing housing market. In 1998 the tax code was changed eliminating IRS section 134 in favor of section 121. The impact meant that you no longer had to move "up" in order to keep from paying capital gains taxes. You could sell your house, keep the money (up to $250,000 for a single person and $500,000 for a married couple), and move into what ever situation suited you. The first thing to happen was a boom in Real Estate as people had the shackles removed from their living choices. The result of the increased demand for housing was a sharp rise in prices. But like any expansion, the forces that sustained it, primarily a desire to cash-out, slowly evaporated. We now have expensive housing with few people willing to change their circumstances until they need to.

The news is not all bad however. People still need to move and prices in certain markets, like the Bay Area, are held up by other economic forces such as limited buildable area, a significant and affluent job market, and lifestyle. For this reason, the outlook for the Bay Area Housing market is looking better than any other California market. Prices have come down about as far as they can and demand is on the rise again. Look for a turn around in the market in late 2nd quarter or early 3rd quarter of 2008. We won't see the growth we experienced in the early part of the decade but it will continue to grow.