In order to conduct a thorough analysis of the current state of the housing market we need to explore the market through a couple of dimensions. Most important historically has been affordability, or the ratio of prices to incomes. Given the changing demographic situation, we also need to look at the changing tastes and preferences of the future consumers who will be counted on to move us out of this housing mess. Tastes and preferences are much more difficult to quantify, yet to ignore them in the broader context of the market would be a colossal mistake.
The past four years of correction have done very little to fix or change the underlying problem with residential housing in the United States.
True. The residential housing market in the United States is distorted by all kind of tax breaks and subsidies that obscure the true cost of homeownership. Until these social-engineering policies are abandoned and tax credits such as the recent homebuyer tax credit and longer term mortgage interest deduction are removed, housing will not be a free market and prices will not be at an equilibrium level.
Population growth and rising income levels will spur the traditional housing move-up market.
False. For the past ten years overall incomes rose less than inflation1. Many current owners are stuck in their homes, unable to sell at a profit and unwilling to sell for a loss. Without transactions, the traditional move-up market collapses forcing the starter home purchasers into homes they traditionally would have been living in later in the move up market.
Homebuilders are soon to ramp up new home construction spurring economic growth.
False. We haven’t yet begun to see the results of the overbuilding spree of the past ten years. True demand for new residential housing units is exceptionally weak and will remain constrained as long as there are suitable existing homes that can serve the market at a lower price. Many prominent experts believe banks are holding foreclosed properties off the market, which will ensure a strong supply of homes for sale in the future as banks begin to catch up to foreclosures.
Baby boomers retiring will drive a new wave of supply on the market. Coincidentally, a new wave of demand will also be developed for retirement housing.
True. Pretty self-explanatory - as boomers age and need to downsize their homes, they will need to move somewhere else. Where is still a matter of contention – I will speculate it will be more urban settings closer to doctors and stores. Others speculate that they will move in with children/relatives, with clear negative effects for the housing market. At the same time, boomers will be forced to sell their homes in a depressed market with changing demographics.
The current housing stock will not support future growth.
True. This one is a little further out. Going back to the tastes and preferences discussed earlier, it is starting to be understood that Generation Y buyers have different needs and wants than the retiring boomers. The picture that is emerging is of Generation Y wanting to be more urban and closer to city centers, driven both by economics and efficiency. This creates a disconnect between buyers and sellers, as sellers try to sell homes that buyers don’t want to buy. The net result is that prices will have to drop significantly to encourage buying. Two problems emerge: Prices could be driven down on boomer homes (suburban/exurban) and there could be a shortage of urban homes as both younger and older generations compete for the same living units. The two large unknowns are how Generation Y buyers will feel when they start to have families and what effects rising or falling energy prices will have on the timelines.
The recently expired homebuyer tax credit has stabilized the market.
False. To the contrary, they only served to prolong the correction and add more debt in the process. Studies show that up to 80% of the buyers would have purchased anyways. A recent Federal Reserve2 study found that 5.6% of homeowners nationwide and a staggering 39% of owners (in major metropolitan areas that are the worst hit) are underwater in their loans today. Being underwater is a large risk factor for future defaults, which will only socialize more costs onto taxpayers.
We cannot have an economic recovery with a housing bust.
False. A key component of the market is expectations. As long as consumers have rational expectations about the direction of housing prices, they will make rational decisions that are best for their own pocketbooks and as such will be best for the economy as a whole. Inducing buyers into a declining market and stretching them thin will not assist in an economic recovery even if it does help a small segment of the housing market. Strong buyers who can support the housing market will propel economic growth in both declining and rising housing markets.
Due to many issues mentioned above as well as others that were not mentioned, any discussion of a current housing recovery is premature and likely to be proven incorrect in the coming years. Based with a massive oversupply of homes relative to demand, prices on a national basis should remain depressed for years as the market works to clear itself of excess inventory. If the government would end market manipulating practices, the market would clear quicker and a recovery would be attained.
In the end, a rational housing market with historical growth rates and affordable home prices would be good for all: buyers, sellers, and participants in the national economy.
1.”A Decade with no Income Gains”, Oct 2009, economix.blogs.nytimes.com/2009/09/10/a-.../
2.”The Home Ownership Gap”, May 2010, www.newyorkfed.org/research/current_issu..(.pdf).
Disclosure: No positions