There is so much speculation lately about our economy, the recession and the housing market. Some real estate agents and many of the pundits have a gloomy outlook.
It’s sometimes hard not to be pessimistic; a few years of soft markets and declining property values will do that to you! Especially when the media piles on with the bad news, often ignoring any good news around.
Earlier this week, I read an interesting article from Forbes magazine titled “Why Housing Will Come Back.” I highly recommend it to you.
The premise of the article is that the housing bubble that burst was necessary, and that since the burst, property values are in much more realistic ranges and that will drive sales in the future. Additionally, the author, Joel Kotkin, argues that the future demographics of our country favor a strong real estate market, and that the American dream is alive and well.
Kotkin discussed some of the reasons that many fear the future housing market is doomed:
“…Conservatives rightfully look to diminish the outsized role of government in promoting homeownership. Some suggest that Americans would be better off putting their money into things like the stock market or boosting consumer purchases
New-urbanist intellectuals like the University of Utah’s Chris Nelson predict aging demographics will lead masses to abandon their homes for retiree communities and nursing homes. The respected futurist Paul Saffo predicts that as skilled laborers move from Singapore to San Francisco to New York and London, there is little need to “own” a permanent place. In the brave new future, he suggests, we will prefer time-sharing residences as we flit from job to job across the global economy.
Some of the greatest hostility towards homeownership increasingly comes from the progressive left, some of whom are calling for the total elimination of the homeowner mortgage interest deduction. “The Case Against Homeownership,” recently published in Time, encapsulates the current establishment’s conventional wisdom: that homeownership is by nature exclusionist, “sprawl” promoting and responsible for ‘America’s overuse of energy and oil.'”
He also points out that housing values in some of our major cities were way out of control (emphasis mine:)
“The disequilibrium was the worst in regions like Los Angeles, Las Vegas, San Bernardino-Riverside and Miami. At the peak of the bubble, between 2006 and 2008, according to the National Homebuilders Association- Wells Fargo “Housing Opportunity Index,” barely 2% of families with a median income households in Los Angeles could afford to buy a median priced home; even in the traditionally affordable Riverside area, the number was roughly 7%. In Miami, barely 10% could afford such a purchase; in Las Vegas, often seen as one of the cheaper markets, only 15%.”
And then the bubble burst. Kotkin argues that the burst was inevitable, and that it was the best thing that could have happened:
“What we are going through now is not a sea change but a correction from insane government and business practices. The rise in homeownership from 44% in 1944 to nearly 70% at the height of the bubble reflected a great social democratic achievement. But by the mid-2000s government attempts to expand ownership–eagerly embraced by Wall Street speculators–brought in buyers who would have historically been disqualified”
“Rather than artificially constraining supply and protecting irresponsible borrowers, we should let nature take its course. Home values need to readjust historic balance between incomes and prices. Over the past 60 years, notes demographer Wendell Cox, it took two to three years or less of median household income to purchase a median-priced home. At the peak of the boom, that ratio had ballooned to 4.6.”
He offers as proof of his theory, this:
“What a difference a market correction makes. The affordability number for Los Angeles is now 34%, 17 times better than two years ago, while Riverside is now near 70%. Miami’s affordability picture has improved to over 60% while in Las Vegas, it’s back over 80%.”
Kotkin also argues that the future demographics of the country includes two groups that will drive strong housing sales: the Millenial generation and immigrants. He defines the Millenial as those born after 1983 who are 60 million strong and just now entering their late 20’s, and looking for houses and “a place to establish their roots.” And he argues that the immigrants coming into the country are also looking for the American dream of home ownership, that in fact that is what is bringing them. They come looking for a home and for space, like in the suburbs. If they desired city living in concrete and hi-rises, they could achieve that in their own countries.
Then Kotkin offers this caveat:
“Of course without a return to robust job growth, particularly in the private sector, the home market– and pretty much all mainstream consumer purchases–will remain weak. No matter how low prices get, people worried about losing employment do not constitute a promising new market for homes.”
I agree with most of Kotkin’s ideas. Housing values in Fayetteville, NC have not taken the hit that values have in many parts of the country, especially Florida, Nevada and California. Still, the market is well of its high and buyers are reluctant or unable to purchase at the rate they were a few years ago. That remains true even though we expect significant growth over the next few years as BRAC (Defense Base Closure and Realignment Commission) brings many more soldiers and civilians into the area.
But, I also believe that same idea can be extended to our overall economic future.
There is no doubt that our country is drowning in debt and unable or unwilling to correct its spending. I believe that we must, if we are to have a better future.
There’s also no doubt that will mean pain for a lot of people, just as homeowners have experienced the pain of a collapsing market. Ouch! I’m not looking forward to that!
Still, it may be the medicine we need to return to prosperity.
What do you think?
Great analysis of the housing situation.
I have hit the ‘Suggest’ button!
Dave: Thanks for visiting.
Exactly right. And the argument could be made that those values were so inflated that we might not reach them again for years!
Oh Holly, Thanks! I enjoyed the article so much I had to share it.
Excellent summary of the Forbes article and well worth thinking about as we zoom into 2011. Your question “will housing come back” is perhaps one many realtors think about every day. The issue is come back to what? Housing today is what it is and there are opportunities in it for both buyers and sellers depending on their circumstances and reason to buy or sell. Hopefully, this current landscape of real estate will motivate more people to become financially literate and the same for our industry. Without a significant shift in employment and income, it will be difficult for homeownership to climb. Everything is connected in our political economy world.
Emily: Thanks for stopping by.
You’re right! Until we fix the econmy, we’re in for more of the same.
I’ll second Holly here. Very insightful analysis, and lots to chew on here.
Scott: Thanks for taking the time! ENjoyed your posts, also.
Beautiful post Julissa! Suggest and a re-blog. This is my first time here and as I scrolled down through your posts I noticed how aesthetically they looked, just from the appearance factor. Great use of photos and art.
Steve: Thanks! and thanks for visiting!
Heading over to check yours out, because by the looks of it, you’re doing pretty well!
This is a very informative post.
It looks as if coming back could mean that housing will once again become unaffordable for most median income families. The assumption is that most median income families will be unwilling to save enough to make a substantial down payment on a home. If home prices remain stable, saving for a down payment could once again become fashionable, and new home owners would have enough equity to feel as financially secure in their home as they feel socially secure.
At some point government tax policy may want to shift from encouraging large mortgages on homes to encouraging home ownership. Perhaps, as Kotkin suggests, I’m running the risk of sounding like a member of the progressive left, but a permanent homebuyer tax credit in conjunction with a permanent homeowner tax credit would do much more to encourage homeownership than a tax deduction for interest paid.
Julissa, as you mentioned, our country is drowning in debt. My opinion is that tax incentives for large mortgages encourage individuals to do likewise.
Hi Mike: Thanks for reading!
I agree with a lot of your thoughts. It surely would be wise if home ownership was a goal that could be reached thru sensible home values, owner downpayments, and mortgages that make sense, especially in qualifying buyers.
If that happens, home ownership will always be the American dream.
Very intriguing. One question is what is recovery anyway? If values went down 30%, how many years of 5% annual appreciation will it take to climb back to the pre-bust values? Years.