My Latest Huffington Post Column: 'Housing: No Mood for a Recovery'

Below is my latest column for The Huffington Post, entitled "Housing: No Mood for a Recovery":

Amid all their talk about a bottom in the housing market, the optimists are ignoring some key facts. For one thing, the costs of ownership remain high. Prices relative to incomes and rents are still above long-term averages. Mortgages are increasingly hard to come by, despite all the taxpayer assistance lenders have received. Inventories are nearly double what they were earlier this decade, a quarter of existing homeowners owe more than their properties are worth, and foreclosures continue to rise sharply.

But it isn't just the obvious or most pressing concerns that undermine prospects for a sustained recovery. Even if millions of Americans suddenly had the wherewithal to acquire a new or bigger home, or were simply content to hang on to what they've got, many of the critical factors that feed longer-term booms are fading away. More specifically, people are rethinking what has been a key facet of the American Dream: owning one's own home.

One reason for the change in attitudes is "the new frugality." While it is not unusual to see consumers tightening belts and holding off on expensive purchases during a downturn, the evidence this time around suggests we are seeing a secular shift in buying behavior. Suddenly, fewer Americans feel compelled to keep up with the Joneses or to follow in the footsteps of those before them. Indeed, an April 2009 Gallup survey confirmed as much.

All in all, 51% of Americans project that they are going to settle into a new, normal pattern relating to either spending or saving. Within this universe, a group of significant interest is those who say they are going to be not only spending less in the years ahead but also saving more -- behaviors that would mark them as true exemplars of the 'new frugality.

But it isn't just spending habits that are undergoing a sea change. The bursting of three major bubbles during the past decade or so -- two in the stock market and one in real estate -- have driven home the point that traditional havens for wealth are risky propositions. At the margin or, perhaps, more broadly, Americans are becoming less comfortable with the notion of putting their principal at risk, especially when there is borrowed money involved. Instead of thinking about gains, they are worried about losses -- a turnabout that some call a "secular risk aversion."

A recent story in the San Francisco Chronicle, ""More Share Space to Shave Costs in Recession," points to another development that could, and probably will, temper the urge to own. The article details the scramble by individuals, couples, and families to cope with the downturn by cohabiting with others. Although short-term financial pressures have been the key driver until now, many will find the benefits of sharing hard to resist. Eventually, such arrangements will be seen by no small number of Americans, especially those at the bottom of the economic -- and property -- ladder, as a viable alternative that leaves more in the kitty for other things.

Demographic factors will also boost the attractiveness of renting relative to owning. A post at Calculated Risk, "Research on Homeownership Rate through 2030," points to research by Professor Arthur C. Nelson, Director of the Metropolitan Research Center at the University of Utah, which concludes that a shift towards a "new urbanity" and away from suburbs will foster a decline in the homeownership rate. The author also argues that a growing number of baby-boomers will eventually repeat history and decide that renting is an attractive option during their golden years.

Lending further support to a change in attitudes about living arrangements is the current Administration's plans to abandon George W. Bush's vision of an ownership society. According to the Boston Globe, President Obama is proposing to pump $5.25 billion of stimulus money into creating tens of thousands of federally subsidized rental units in U.S. cities. While there's no doubt that public policymaking can have unintended consequences -- government-sponsored disasters like Fannie Mae are a case in point -- the implications for the housing market are hard to miss.

One factor that plays a role in all trends, of course, is the seemingly irrational but innate human desire to follow the herd. But here again, the prognosis is poor as far as rising house prices go. Already, continuing poor fundamentals and four years of falling prices have had a corrosive effect on popular sentiment and have undermined the conventional wisdom about the benefits of investing in real estate. The longer it goes on, the more people will lose faith, and the less likely they'll be around to help foment a sustainable recovery.

In the end, it took nirvana-like economic conditions, a lopsided policy focus, a relentless drumbeat of positive reinforcement, and an accumulation of days, months, and years before home ownership became the mantra of long-term prosperity. Given how things look now, the pendulum swing back in the other direction almost certainly has a long, long way to go.

Comments

[Rob]

When President Obama tells us that he's going to start pouring billions into rental housing, there are two questions we should be asking:

1) Why is it that government always has to push something or other, whether it be homes, cars, or waffle makers?

2) With regard to housing, is there any doubt that there is presently a surplus of available rental property in the marketplace?
http://www.calculatedriskblog.com/2009/07/surge-in-rental-units.html

While I agree with much of the author’s analysis, one thing I've read over and over lately drives me up the wall. Please don’t mistake me for a Bush apologist. But while the Bush administration did term the phrase “ownership society,” the reality is that presidents have been pushing an “ownership society” (whether explicitly stated or not) for close to a century.

Hoover got the ball rolling with when he signed the Federal Home Loan Bank Act in 1932. FDR took it as step further when he created the FHA, Home Owners' Loan Corporation, Federal Housing Administration, Fannie Mae, and various other programs. Virtually every president followed suit, giving us the likes of HUD, Ginnie Mae, Freddie Mac, 1977 Community Reinvestment Act, Secondary Mortgage Market Enhancement Act, Federal Housing Enterprises Financial Safety and Soundness Act, Office of Federal Housing Enterprise Oversight, the Clinton administration's expansion of the 1977 Community Reinvestment Act, and of course...Bush's policies. And this is just a sample. I'm sure that I'm leaving out a horde of other government intervention.

If history has taught us anything, we can safely assume that the government will pull back very little, if at all, from its pro-home ownership stance, while simultaneously expanding funding for pro-rental projects. Is everyone as excited as I am for the next 2009 federal budget deficit revision?

[roger]

I don't think there is a country in the world so
paranoid about government,and look at the results.
government is an instrument of policy,it either is
controlled by the big corporations or by the people.
You get the government you vote for.period,

[ian]

Bottom line: If neither the finance industry nor the real estate industry can provide a safe haven for my money, why should I invest it in either? For the individual, it's not about quick gains, it's about sustainable gains. When the market crashed and the real estate industry crashed, faith was lost in both vehicles and there is, as yet, no replacement.

[SteveM]

Another interesting twist on residential real estate is the behavior of specific housing segments. Take McMansions, over-sized, expensive to maintain and high property taxes. When the crumbling middle class realizes that they can adequately subsist with 2,000 square feet rather than four, who's going to want the monstrosities in the middle of nowhere?

I can foresee McMansion sub-divisions evolving into shared accommodation dwellings of 2 or 3 families per home. Populated by the immigrant labor that can still find work.

[CBFE]

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CBFE Economics

[swoux]

For latest mortgage application data, do to mortgagemaxx.us

Best.