Many authors and commenters on SA and in the wider media have been predicting continued declines in the housing market. This author in particular has been suggesting for some time (in comments on other articles) that Case-Schiller Index figures will likely reach the 90 to 110 range in the majority of major markets before too much longer. The reasoning behind this logic is clear:
- High unemployment: Even if you could still get a loan you can't service debt maintenance obligations without a steady source of income;
- Reduced income security for many working Americans as the results of layoffs, annual salary adjustment freezes and furloughs amongst state and non-profit agency employer;
- High numbers of underwater mortgages are leading to a growing trend of strategic defaults as homeowners decide they are not bound by any higher moral standard than Wall Street.
What is less common are authors suggesting possible futures for home-building and housing markets. In a previous instablog post, I discussed the potential for the formation of property aggregating firms that could acquire real properties and convert them to rental use. Growth of such firms offers great potential for stabilizing the cost of real property ownership, as a management firm that controls multiple properties is able to employ significant economies of scale related to property accounting and maintenance which the average homeowner does not have access to.
Growth in the availability of rental properties would also more aptly suit the residential needs of many working Americans who - in an age where job security continues to wane - would be foolhardy to tie themselves down to a single geographic area for a considerable period of time.
Home-building must be regarded as a maturing industry. During the boom, many new firms sprang up, many existing firms grew rapidly, and the industry as a whole went through a fat period that led to unsustainable growth. As is typical of a maturing industry, many less efficient firms, or those whose products do not offer a greater than average degree of social utility, will disappear.
The mechanical function of real property is likely to become an issue of growing importance over the course of the next ten to fifteen years. It will no longer be possible to sell a house just because it's a house. Homes will have to offer EnergyStar, LEEDS, or similar types of energy efficiency ratings, along with a practical footprint. Homeowners' focus on energy efficiency will likely escape the realm of political bickering and become a matter of growing fiscal concern as rapid fluctuations in world currencies leads to unstable fuel market prices.
Aesthetics will also become an issue of major concern. The collectors of fine goods who complain that they can't make use of a typical hardware store because the cheap imported fixtures lining the shelves look tacky and cheap are likely to be found right. A significant improvement in the fit and finish of homes will also likely become a necessity of industry survival.
Real estate markets will stabilize. I feel the potential for significant depreciation of real estate beyond the 90 to 110 range, as defined by the Case Schiller Index cited in this article, is highly unlikely. However, the days of constructing property for $150/sf and selling it for $300/sf are long gone. The industry is maturing and those who survive will be those who have the time, the patience, and the right business plan to offer homebuyers more than an over-sized box filled with "Builder's Special" parts.
February 2010 Case-Schiller Index Report Data is available here.
Disclosure: No positions