The Possibility of Great Change in the Housing Market (July 24, 2007)

10May14

First, this note from CNNMoney:

“NEW YORK (Reuters) — Countrywide Financial Corp. Chief Executive Angelo Mozilo said the U.S. housing market is unlikely to recover before 2009, as lenders and homeowners work through oversupply, stagnating home prices and the excesses of recent lax lending standards in much of the mortgage industry.”

People have to have money to buy houses and to keep up their payments. To have money, they have to have jobs and/or savings that pay the way. They don’t have savings, for the most part: the U.S. is a notoriously poor saver. The long-term prognosis on jobs is that we are in a period of global leveling, in which wages of competitive workers in India, China, and elsewhere move toward equilibrium with western wages — which means that qualified people earn more in Asia and less in Europe and America.

To some extent, some of those people may come over here and buy houses. Obviously, that is not likely to be politically acceptable en masse. The properties purchased by foreign investors will tend to be selective and at the upper end of the scale.

People will also tend to have less money to buy houses if they are obliged to spend more elsewhere. They will be so obliged. There is a tremendous national debt that will have to be paid down somehow over the long term. Some of that payback may come through inflation, in which the dollar becomes worth less and it is therefore easier to pay back fixed obligations. For example, if your wages go up by 100%, then it should take only half as many working hours for you to pay back a debt. In years past, the Fed was committed to battle inflation. I am not certain that commitment is still there. Battling inflation means squeezing the economy, and that is politically unpopular. So I expect we will see somewhat higher inflation, especially as prices on imported goods rise — that is, as the dollar value against other currencies.

The rest of the paydown will have to come through taxes. It was fine for Republicans to complain bitterly about taxes, starting especially in the mid-1990s; but somebody, somehow, has to pay the bills for your basic Iraq wars, health care, retirement, and so forth. It seems unlikely that taxes will go lower than they are now, at least during the next 10 years or more; and there is a good chance they will go significantly higher.

When it becomes sufficiently difficult to buy a house, there may also be a change in culture. It is one thing to entertain a dream when it is realistic. It is another when it is not. When people can’t get what they originally wanted, they often rationalize things in the process of coming around to a different reality. An increasing emphasis upon environmental awareness could easily persuade a new generation of would-be home purchasers to view today’s homes as wasteful monstrosities filled with too much excess stuff. The dream of the house with the white picket fence and two cars in the garage may be rejected as people continue to adjust to high divorce rates and fewer traditional family role models. Housing tastes may also change as the population ages. Older folks do not necessarily want what younger people want. For whatever reasons, there may simply not be as much of a taste for what previous generations might have considered a normal home.

Nobody has a crystal ball. My bet, however, is that we started to reach the point of having a bubble in housing prices when a critical number of people began to think of their houses primarily as investments. The bet, at that point, was based on the Bigger Fool theory — that if you were willing to pay $X, someone else would come along who would be willing to pay $X + $10,000. At some point this logic collapses, in any bubble market, and we reset back to the point where people decide to buy after considering a broadened set of options, as distinct from what has merely been fashionable.

It is not difficult to imagine how things could change. For example, there could be a market for clean, tiny, well-maintained condos, along the lines of a Microtel, for those who want ownership that makes sense (e.g., for people who are rarely at home), at a price that their likely incomes will support within a globalized economy. Also, people may eventually be broken of the knee-jerk assumption that, of course, everyone buys a house whenever they live somewhere (to overstate only moderately). Federal and state governments may find it makes sense to discourage people from plowing their financial assets into unproductive improvements in lavish private homes. Popular wisdom may no longer emphasize that home ownership creates stability; it may instead observe that home ownership causes families to turn inward, away from constructive engagement with others in their communities.

Developments like these could permanently change the face of residential ownership in the U.S. The open question now is whether we are in a mere down period before we resume upward price movement, or whether things are changing on this sort of deeper level. Of course, the longer something falls, the more likely it is to be broken when it finally hits bottom. The Great Depression didn’t just cost money. It changed laws, significantly. It created distrust — toward banks, for example, and toward Wall Street. In its German manifestation (with note of the special circumstances of the Weimar Republic) it laid the basis for Naziism.

When a prominent banker comes out and says, as in the foregoing quote from Angelo Mozilo, that something as fundamental as home ownership is becoming prohibitively expensive (in the sense that your chances of selling at a profit are shrinking dramatically, and also in the sense that some people will be forced to walk away, in the meantime, losing everything that they have invested), and that this state of affairs appears likely to continue for much longer than was originally thought — when that happens, it begins to be time to reflect that perhaps the whole concept of life as home ownership may be slowly changing.

(This item was originally posted in my old computer blog.)

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