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What If Housing Takes a Double-Dip?

Stocks in this article: BAC C JPM WFC XHB

NEW YORK ( TheStreet) -- Housing turned the corner in 2012, but what if around the corner there is a giant cliff?

The consensus view is that the market has bottomed and that home prices will continue to rise in 2013. But most positive forecasts rest on assumptions that could easily be upset.

Everyone agrees that all bets are off if Washington fails to reach a deal over a long-term fix to the federal deficit, triggering an automatic expiration of tax breaks and mandatory spending cuts in 2013- a concern commonly referred to as the "fiscal cliff."

Economists fear that if politicians "go over the cliff", the economy will fall back into a recession. It would be the "opposite of the stimulus", says Jed Kolko, chief economist at Trulia.

"The stimulus in 2009 pumped $800 billion into the economy over a few years. The fiscal cliff could take $600 billion out of the economy in one year," said Kolko. "If nothing in the fiscal cliff is resolved, if we do have big tax hikes and spending cuts persisting through next year that will hurt the economy and the housing market."

Kolko expects the fiscal cliff will be resolved, but other external shocks also remain.

A disorderly break-up of the Eurozone for instance could trigger a credit crunch once again that could see interest rates and unemployment rise.

According to Paul Diggle at Capital Economics, every 0.25% rise in interest rates reduces home price inflation by 1% to 2%. Meanwhile, "as unemployment rises, the mortgage delinquency rate would also increase and banks would be forced to dispose of a growing shadow inventory at a quicker pace. The inventory of homes for sale would increase sharply," says Diggle. "In these circumstances, the housing recovery would falter. Our model suggests that house prices could easily fall by 5% per annum over the next few years."

This is of course a bear-case scenario. Diggle's actual forecast is for a 5% rise in 2013 and a 4% rise in 2014. But the bear-case is not improbable.

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