Robert Loftus'  Instablog

    All evidence is pointing at a downward trend in home prices following the cessation of the Home Buyer tax credit.  Recent news of a 0.6% uptick in housing prices is likely a result of this phenomenon.  Traditional notions of home ownership as a public good that helps to prevent urban decay have become out-dated in an environment where out-sourcing of jobs and continuous cut-backs in employment by cash-strapped States mean that the average working American has no way of knowing what his or her employment prospects will be in another two to three years.  

    Those familiar with my comments on SA know that I have been predicting for some time that housing prices still have a long way to fall, and that we're likely to see Case Schiller ratings of 90 to 110 in the majority of major RE markets before too much longer.  Given an unemployment rate that remains stubbornly high, a figure which will be aggravated by large numbers of unemployed college graduates over the course of the next month, potential employers are still able to Cherry-Pick applicants, and do not have to offer anywhere near the kind of compensation that they might have to in a competitive employment environment.  Also, just because the economy does appear to be improving marginally does not mean that we will see an automatic end to all efforts to out-source professional positions-such as engineering and software programming positions-to India or China.  There is also another factor-which I've stated repeatedly-that the generations succeeding the Baby Boomers aren't likely to have the financial wherewithal to acquire the assets of the Baby Boomer generation, which means as Baby Boomers start down-sizing and trying to create a simpler lifestyle that they will be better able to keep up with in their older years, many will take significant financial losses as they liquidate assets-including homes-that they've acquired over the years.  

    The points cited above point to one of the greatest problems with Real Estate-it's obvious lack of portability.  The traditional notion of home ownership as a public good that helps to prevent urban and suburban blight is out-moded in a society facing the employment conditions cited above.  It is foolish to expect average working Americans to fall on their swords for the benefit of the mayor and school-board.  A more successful approach to Real Estate would identify the needs of working people and would seek to address those concerns through the proper application of market forces rather than a myriad of government programs and subsidies.  A massive conversion of single family homes to duplex and triplex rental units could help to stabilize RE markets. 

    Price stability in RE markets is only likely to come when prices have fallen to the point where potential landlords see a significant prospect for financial return via the acquisition of residential properties, and the conversion of those properties to rentable space.  This transition will likely include the conversion of many McMansion properties to duplex and triplex uses, so that landlords are able to offer more realistic rental rates for those properties.  This transition will likely produce an enormous NIMBY response as many municipalities will face the decision of whether to allow duplex and triplex use and thereby enhance the transition of empty homes to income generating properties, or insist upon single family dwellings and eventually see massive property devaluation, empty homes, and expanding property tax seizures.   

    The transition away from traditional notions of home ownership to a more flexible rental based RE market is the only way to serve the housing needs of the American public, given volatility in employment, it is not realistic to assume that so many Americans will continue to purchase homes with mortgages that they may only be 7 to 10 years into paying off before they have to move again, or have to live with the continual specter of default because of job loss due to out-sourcing or state job cut-backs.  In a time when the best advice you can give to a young person considering different careers is to select a field where the work is done in person-doctor, nurse, teacher, etc-so your job can't be out-sourced to China or India, a more flexible approach to the management of RE is absolutely essential.  


Disclosure: No Positions