Housing Market Update: Hope Springs Eternal

01Dec12

Seven months ago, I posted a note on this subject with the subtitle, “Don’t Hold Your Breath.”  The central message was that, in my opinion, the residential real estate market was not gradually returning to the familiar good times of previous years.  Rather, I opined, we are in a period of revolutionary change.  The people who keep wanting to see everything getting back to the way it was, I suggested, may be part of the problem; they may be impairing a transition to a necessary new way of thinking about housing.

This contrast emerges in recent articles.  On the good-news side, Forbes presents the claim that “construction starts are 41% of the way back to normal,” with a 42% rise in October 2012 over the figure from October 2011; existing home sales are “59% back to normal”; and the combined rate of delinquencies and foreclosures is “41% back to normal.”  Averaging these figures, Forbes says, the overall housing market is “47% of the way back to normal – compared with 25% in October 2011.”

There does not seem to be any particular reason to believe that an average of those three numbers would provide a reliable overall sense of what is happening in housing.  To the contrary, one should note that the 59% figure for existing home sales is nearly 50% higher than the 41% and 42% figures for delinquencies, forbearances, and construction starts.  Forbes’s own figures suggest that existing home sales are on a different trajectory from those other measures.  In addition, Forbes is suggesting that the overall housing market progressed only one-quarter of the way back to “normal,” even in its best year since the mortgage meltdown.  At that rate, Forbes seems to say, it will take another two years of exceptionally good news to return to normal.  As shown in the foregoing percentages, even if that did happen in existing home sales, progress might be considerably slower in delinquencies, foreclosures, and construction starts.

Against those hopes, there continue to be significant barriers to housing recovery.  About 20% of all mortgages continue to be underwater, meaning that if those homeowners sold now, they would still owe something (perhaps a lot) to the bank after cashing out and moving on.  Even a 5% rise in house prices, not predicted for the coming year, would still leave about 17% (i.e., nearly 10 million) underwater.  These are people who cannot participate in the housing market – and even if they could, it is not clear that all of them would be eager to tie another chain around their necks.  The possibility of significant revision of the highly leveraged approach to residential financing, and the current difficulty of obtaining mortgages, raise the question of where the buyers and the money will come from for a full return – ever – to the way things were.  As I noted in previous posts, you cannot have a middle-class housing market when the middle class continues to erode.  A person ought to pause when a majority of home builders still think housing market conditions are undesirable from a business perspective.

Simply put, you cannot have an exuberant housing market and a cautious housing market at the same time.  We used to have the former; now we have the latter.  This is a fundamental change.

The question is not whether the housing market has shown strength in recent months; the question is why.  No doubt governmental programs to assist struggling homeowners have helped somewhat.  Probably a more significant explanation is that slamming on the brakes produced swelling demand, among those who do still want and are determined to buy homes.  What is remarkable, from that perspective, is not that there has been this recent strength in the housing market.  It is, rather, that after years of profound caution and uncertainty, the demand has not been greater.  We have seen a briefly impressive bump in housing, but will it last?  One might reflect upon a statement by economist Ben Herzon:  “Housing seems unfazed by the uncertainty that is plaguing other parts of the economy.”  If people are uncertain about their finances generally – and they have good reason to be – then it might pay to hesitate before pronouncing that the worst is over.  There are grounds to be concerned that the recent show of strength is merely a temporary accommodation of pent-up demand – a false dawn that will draw out and punish many of the remaining cockeyed optimists, in a continued  shifting of fundamental forces.

My last post on this subject, seven months ago, anticipated a continuing fall or, at best, flat housing prices during the coming year.  As of this moment, that anticipation was wrong overall, though possibly true in some markets.  I do think, though, that this autumn’s burst of energy will be short-lived, and that, as of April 2013, my one-year look-ahead will not be far off the mark.

The larger claim in my previous post, consistent with an earlier post (August 15, 2011), was that “the booming real estate market is really, truly dead” and that “the percentage of the population living in single-family homes is now in a historical phase of long-term readjustment.”  That is, the softening of the market is a cause and/or a result of shifting realities in what people want and need from their residences.  As has been clear for some time, when the jobs dry up, people find it necessary to reduce their lodging expenditures.

That is the message of a recent New York Times article, in which Penelope Green suggests that at least some in America are now in the process of going back to a non-nuclear, pre-WWII concept of home.  In particular, for some time now, many single parents have had to make a go of it in significantly oversized houses, and many others have been finding it necessary to shelter their post-college kids and/or their aging parents.  Green contends that 41% of Americans aged 25-29 are living or have recently lived with their parents; that more than 50 million Americans are now in multigenerational households; and that, to cite one example, 30% of the customers of one homebuilder are requesting houses with internal sub-apartments (more formally known as “accessory dwelling units” or ADUs) with separate entries and other features suited for such domestic arrangements.

In Green’s view, for some time now, zoning and other contemporary expectations have forced people to accept plans that they cannot afford or that do not meet their needs.  Green provocatively quotes one buyer whose new home contains an ADU for his widowed 82-year-old father, and whose neighbors are his sister, brother-in-law, and the latter’s parents in a house with an ADU on one side, and his mother-in-law on the other side.  The buyer said, “Communal living fosters love, and commitment, and all the good values we want. Think of a rubber band being extended. That’s the way most of us have been living. That is going to snap back when people say, ‘This isn’t working.’”

Obviously, America is not going to subdivide suddenly into communes.  But there is enormous potential, and need, for a return to concepts of home and community that depart radically from the paradigm of isolated two-parent single-family dwellings that still flood the market.  No doubt many homeowners will get above water long enough to sell, though of course that just passes the question of housing value on to their buyers.  There will surely continue to be some demand for such houses.  But the faith in a return to the way things were continues to look unrealistic.

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