Lower Home Prices Aren’t Necessarily A Bad Thing
The housing market has changed over the past five years, and that's a good thing.
From The Independent further confirmation of the extent to which the housing market has fallen from its heyday:
The ailing US housing market passed a grim milestone in the first quarter of this year, posting a further deterioration that means the fall in house prices is now greater than that suffered during the Great Depression.
The brief recovery in prices in 2009, spurred by government aid to first-time buyers, has now been entirely snuffed out, and the average American home now costs 33 per cent less than it did at the peak of the housing bubble in 2007. The peak-to-trough fall in house prices in the 1930s Depression was 31 per cent – and prices took 19 years to recover after that downturn.
If the numbers themselves don’t bring the message home to you, then this Case-Schuller Price Survey chart, updated through January 2011, most assuredly will:
That spike that starts in the late 1990s and runs all the way through July 2006 is a the housing bubble. It was caused by a number of factors, including government policies that encouraged lenders to give loans to customers that may not have met traditional tests of credit worthiness. However, primarily, it was caused by a classic speculative bubble, by homeowners who came to view their homes as a piggy bank rather than a long term investment, by homebuilders who built new developments as fast they could, and by lenders who stretched rational lending rules to the limit in order to profit from the housing boom.
If you stepped away from it and looked at it rationally, it’s clear that the whole thing was unsustainable in the long run. People who barely made enough money to rent an apartment are not going to be able to make the payments required under an LIBOR loan for several hundred thousand dollars. Continuing to build new houses was eventually going to create a saturated market, forcing prices down. Treating mortgages like securities simply to make more money off them was a recipe for disaster. And, most importantly, everyone seems to have forgotten that prices don’t always go up, even when the economy is good. Some people did see the collapse coming, but they were largely dismissed in an era where buying real estate was the new way to make a quick, easy buck.
Some bloggers, conservatives of course, blame the current state of the housing market on President Obama, but that misses the point entirely. Certainly, the unemployment situation and the relatively weak state of the economy are contributing to the slow rebound in home sales. However, the biggest contributor is the fact that the collapse of the housing bubble created a massive supply of foreclosed home which continue to flood the market, putting downward pressure on prices. That, combined with the fact that lenders are nowhere near as loose with credit as they used to be, is the reason the market hasn’t boomed back, and is unlikely to for some time to come.
And that’s not necessarily a bad thing. The housing bubble caused tremendous damage to the economy, damage we’re still dealing with today. The idea that anyone would want those days to return is, quite honestly, mind boggling. The American Dream of owning a home is still alive, but it’s just dealing with a more rationalized housing market now (meaning that you might end up owning a townhouse instead of that five bedroom house in the suburbs).
Home prices are likely to continue to fall until the market reaches an equilibrium point. That won’t occur until the foreclosure and at-risk properties are cleared from the market. That won’t until the economy itself recovers far more than it has to date. What’s clear, though is that the Housing Bubble isn’t coming back, at least not for several more years. Considering the risky lending, faulty decision making on the part of homebuyers, and irrational exuberance on the part of everyone that accompanied it, there isn’t any reason why we should want those days to return .