I was playing golf with a client about 2 years ago, and as I was lining up a putt, I declared that it was impossible for the housing market to get so expensive that people couldn't afford houses. Home prices are governed by supply and demand like any other market, I reasoned. If the price is too high, demand would fall. Since demand (at the time) was in fact, rising, obviously prices aren't so high that homes were generally unaffordable. Obviously it could become unaffordable for a given consumer, but not for consumers generally.
What I ignored was the possibility of widespread investment in residential real estate. According to the National Association of Realtors, 27.7% of homes bought in 2005 were for investment. Investors have to outbid consumers for properties. It may be that a portion of homes bought by investors wouldn't have sold to a consumer, e.g., a home in such bad condition that its unlivable. In the majority of cases, though, investor demand has shifted the demand curve for homes outward.
So far, housing starts have fallen about 500,000 from their peak in January. Investor demand in 2005 represented about 2.3 million homes, so the lost demand from investors out-weighs the decrease in new supply.
As FRB of Dallas president Richard Fisher said the other day, the Fed really created this housing bubble by holding rates so low for so long. I am increasingly of the belief that investors speculating in the housing market really created the bubble.
Investors will not hold on to houses at a loss. They will either rent them out or sell them at a loss and walk away. The good news for the housing market is that if economic fundamentals continue to be strong, then it should only take 1-2 years to wring out the speculative investors. After that, I'd think the housing market will get back to a more normal pace of appreciation.
The good news for the housing market is that if economic fundamentals continue to be strong, then it should only take 1-2 years to wring out the speculative investors
ReplyDeleteThis is the classic "soft-landing" scenario. When has the US housing market ever had a soft landing? Better yet, when has any asset class shot-up four standard deviations above its trendline (with little change in fundamentals) and not given it all back?
Why is this time different?
OC:
ReplyDeleteWhat is your example of a hard housing landing?
Steve:
I doubt it. I doubt it very much.
What is your example of a hard housing landing?
ReplyDeleteThe best examples? The last two RE declines, expressed in same unit YoY prices (not the median), and in real dollars.
Housing busts look benign on paper, but tell that to the guy who bought the $180k Orange County condo in 1990 that went for $110k in 1996.
Let me elaborate. A hard-landing would be the RE market reattaching to its fundamentals within the next three years. A soft-landing would be the market sitting flat to 10% off for the next ten years.
ReplyDeleteA damn lucky landing would be hyperinflation to bail out the homedebtors. Lucky for them, that is.