ReEconomist

Housing Prices: Bottom or Temporary Bear Break?

Chris B,

Opinion as to why people were willing to spend a higher percentage of income on housing in recent years?

Rationalizing this for many people was pretty easy when appreciation was delivering 4-10% a year. Why not get as much house as you can when it's going up every year was the thinking of many buyers. People were buying payments not price. No thought was given to what it would take to actually pay off the mortgage.

In the years ahead, home prices are more likely than not to be stagnant and flat. This will get rid of the "I'm going to make money on this house" mentality. For a while housing may begin to be viewed as just another consumption item we buy without the expectation of making money off of it. Mortgage pay down and equity build up will be back in style.

The generation of people now in their 70's and older aspired to have a paid off mortgage at retirement. This was a goal to work toward and an accomplishment to take pride in.

In recent times, the younger generation viewed the situation of a paid off mortgage as wasteful. The thinking became, why have all that equity in a dormant state? Borrow it out and invest it in more real estate.

I would expect people to become more conservative in the amount of money they spend on housing. Everyone now knows, real estate can go down and leverage can work against you and when it does it can cause severe financial shock. Most people also know now, they need to use other sources than the self-serving real estate industry when it comes to market information. How can it always be a good time to buy? It can't. There is a more optimal time to be selling and buying residential real estate.

Getting rid of or reducing the appreciation component and a return more conservative approach to housing spending will be good for the housing market in the intermediate and long term.

Housing Prices: Bottom or Temporary Bear Break?

This is a good article and analysis.

There is another phenomenon of the downturn that is becoming more pervasive. That being the decline in people's enthusiasm for home ownership. One of the value propositions for buying a house has been the expectation of steady appreciation. (not with everyone, but it does exist in varying degrees in many home buyers)

With prices falling and not likely to appreciate anytime soon, a lot of people will be asking themselves why are they paying such a high premium for ownership over the cost of renting a comparable property? Up until the bust, most people would justify a premium for ownership cause they were getting a healthy amount for appreciation.

With no appreciation and even depreciation, more people are asking themselves, why are we paying such an exorbitant amount for ownership? And when some answer that question, they will walk away from their mortgages and give the keys back adding to the inventory.

It's more expensive to rent assets that depreciate. Houses have been cheaper to rent than purchase because of the appreciation component.

What happens to prices when the appreciation component buyers assign to a purchase is zero?

Below is a link to a couple of home pricing tools you can check home values for specific areas. The idea is you want to sell the Ceiling and buy the Floor. The Ceiling is the top end, or highest level home prices can be supported based on income levels to house price ratios. The Floor is the bottom end of prices where the income generating ability becomes attractive to investors. Market prices tend to move up and down between the Ceiling and Floor.
www.ushousingmeltdown....