Housing Market Update: Don’t Hold Your Breath
It’s been eight months since I last opined on the U.S. housing market. The title of that previous post was, “Scenario: The Residential Real Estate Market Fractures.” The argument was that realtors and pundits keep talking of a “correction” in real estate — implying an evolutionary adjustment to some new financial realities — when it seems these may actually be revolutionary times, capable of profoundly remaking markets.
In that sense, the situation hasn’t changed. CNN breathlessly announces that home prices are now the lowest they have been since 2002. My bet is that, not long ago, they were they lowest they had been since 2003, and before that, 2004, etc. Will the next headline tell us that the real estate market is now on fire? Or will it say, instead, that home prices are the lowest they have been since 2001?
Part of the answer is that, like politics, real estate is local. Housing markets vary. So when that CNN article reports that there is still a huge glut of “foreclosures and other distressed property sales,” there are and will continue to be exceptions. Overall, though, the U.S. is still burdened, not only with a large backlog of unsold houses, but also with construction, banking, and real estate industries that still want to party like it’s 2006.
It is a new world. We are still hearing reports on unemployment, as though any job were a good job. When the reality of the new world really sinks in, we will be hearing more about the percentage of workers who are earning salaries at or above a middle-class wage — say, $20 per hour. By then, it will have become apparent that you can’t have a growing housing market, in the traditional sense of families that march forth to buy single-family houses, when pessimism continues to rise and the median wage continues to fall.
There is an exception to that. We could sell a lot more houses to foreigners. We aren’t ready to do that. There would be political hell to pay. But I did see an article, not long ago, describing how the white people in some failing small towns on the Great Plains have been slowly coming to accept what some of them surely describe as a takeover by the Mexicans. When wealthy buyers from China and elsewhere are welcomed into local communities, not only by the realtors but also by their new neighbors, there may be something of a counterweight to the American job and wage picture.
Meanwhile, transportation continues to be transformed, people become more aware of water and other resource issues, and sentiments gradually shift toward a new generation with an apparently more communal orientation. In short, people are not flocking back to the old premise of far-flung suburbs in which troubled families live in manorial isolation from one another. The American housing market was built on the dead world of jobs that people held for decades. It is not clear when, if ever, people will again fall in love with the new houses that the construction companies are so eager to build.
The CNN article reports that the home price index of 20 cities fell 3.5% during the past 12 months. Whether it falls at a faster or slower rate in the coming year depends on whether there is an evolution stabilizing, as the realtors hope, or a revolution continuing.
I have been inclined toward the revolutionary hypothesis. These figures seem to support that hypothesis. The hopeful talk continues, and yet the prices continue to decline. Another year’s moderate decline, which is what I expect, will continue to suppress wishful thinking. In the revolutionary scenario, a new paradigm — a new perspective — needs to take hold.
In the revolutionary scenario, it will eventually become clear that the booming real estate market is really, truly dead, and that there are few rapid fortunes to be made there. Then the boosters will go away, and real estate will be more accurately perceived as an appropriate purchase for some people under some circumstances. And since the circumstances supporting such purchases are scarcer than before, it may well be that the percentage of the population living in single-family homes is now in a historical phase of long-term readjustment.
That’s the revolutionary perspective. It seems to me to be the more accurate one. Accordingly, I expect housing prices to remain flat to negative for at least another year.
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