Monday, August 23, 2010

The Age of the Housing Boom May Be Over

Yesterday The New York Times published an article entitled 'Housing Fades as a Means to Build Wealth, Analysts Say'.  As someone who works in the real estate industry, I would like to add to the article my own perceptions and opinions.

The article basically describes what the title states - don't expect your house to make money for you anymore.  Here in California, many friends and associates of mine have held to a belief that housing prices roughly double every 10 years.  This has easily been true here on the coast, but I have been cautioning them for years that it is not a natural progression of the housing market, but instead a reaction of the market to changes in our society and economy.

In the late 1940's and the 1950's, after World War II, the American economy was booming.  This was due in large part to the large military industrial infrastructure's conversion to civilization use and the tremendous job opportunities that arose as the world rebuilt.  Unlike many other countries that participated in the war, the American infrastructure was not destroyed which gave us an advantage for many years.  The ensuing spread of wealth in the United States, plus advances in the mass construction of housing, resulted in a strong middle-class that was able to, relatively easily, provide well for their families and live the American dream of owning real estate.  A real estate boom was on!

Then, in the decades that followed, there was a significant shift in the work force.  Women became a more significant portion of the workforce and the family income potential doubled.  Because families had more wealth, they were able to afford more expensive houses.  But because this was true of most families, the pricing competition for housing increased dramatically, driving up the prices of homes.  Another boom in housing market was on!

In the 1980's, credit became widely available to the middle class in a way it had not before and our collective consciousness regarding credit shifted.  As a whole, we became more accepting of massive debt, relative to prior years.  This had the effect of stimulating the economy because there was an injection of capital into our economy from the credit that was introduced and spent.  Likewise, greater amounts of debt for housing became more and more acceptable, increasing housing prices through the 1990's.

In the early 2000's, the United States economy experienced the Dot Com stock market bubble burst and the September 11th attacks causing our economy to take a hit as well as the confidence in our collective future.  War in Afghanistan and Iraq shortly followed which further threatened our sense of stability.   This is conjecture, but I believe that we reduced the requirements for loans, the cost of money (interest rates), and the protections (regulations) in the credit industries to encourage the housing market boom, that lasted until 2006-2007, in an attempt to ensure confidence in the American economy and way of life through individual wealth building and spending ability.  People spending their real estate equity and credit card balances were rampant.  In 2005, after Hurricane Katrina hit, a new need for the confidence building and economic stimulus arose which I believe extended our unsound lending and borrowing practices, extending the housing boom until 2006-2007 when the housing market crashed.

Because housing prices react to societal and economic changes and do not naturally and rapidly increase on their own, the question is - What will be the next stimulator?  It is my opinion, and the opinion of the analysts in The New York Times article, that there very well may not be another stimulus and that the days of rapid wealth building through real estate, as a whole, are over.  Exacerbating this further is the global equalization in jobs and wages that is occurring where the American worker is being frozen or brought down in their wages until we are equal to the rest of the world - and the rise in interest rates that will likely have to happen eventually and which will increase the cost of homes to borrowers without increasing home values.

Thinking positively, there could be two potential upsides to real estate price increases, though they may be in the distant future and out of reach of the typical American.  The first is the foreign purchasing of American real estate.  As wealth is built around the world, even if it is not specifically happening in the United States, the number of buyers of our real estate will grow which in turn will drive up prices, beginning in what has been, historically, the most desirable areas - such as along the coasts.  Buying in these areas could continue to be the best real estate wealth building investments in the United States.   The second is the buying of real estate throughout the developing world.  Governments and investors are thinking globally and there may be a global real estate boom that we should consider in our real estate investment purchasing decisions.

In my opinion, the smartest plan for homeowners going forward is a return to sound home buying practices where we can reasonably, and perhaps easily, afford the houses we buy and to buy the house that we will be happy in for the rest of our lives.  It is likely no longer reasonable to buy a home that we hope will boost our retirement and wealth.