|Housing prices went up from 1990 (and long before that) until 2006; since then they have fallen to 2004 levels|
That's cold comfort to anyone who bought at the top in 2006 or 2007. But as the above graph shows, anyone who bought before 2004 is still "in the money."
That's just to remind you that despite the recent decline, for most of our lives owning a house has been a good investment, and has allowed us to enjoy better living accommodations than if we'd been renting, and at a much lower price. Okay, renting has been a "good deal" for the past few years ... but if you think about it, how could renting possibly cost less in the long run? A landlord is not going to rent a place to you for less than what it costs him or her -- and it's the landlord who gets all the tax breaks on top of that.
So I'm making my bold prediction -- the real estate market is bottoming, either this year or next, and then we will see the market get back on its inflationary track, and prices will improve for ... literally, the rest of our lives.
For one thing, as shown in the graph below, affordability has improved dramatically. Mortgage rates (if you can get the loan) are low. Real estate taxes have leveled off after many years of increases. And of course prices have come down by 20 to 50 percent. It's like the stock market in March 2009 -- the future looks murky, but prices are so low that if you have any faith that America will grow and prosper, even at a modest pace, then it's got to be a good deal.
|A value of 100 in this chart means the average family has exactly enough income to qualify for a mortgage on the average home. Current value is 191, meaning the average family has almost twice what it needs to qualify for the mortgage|
A second reason is demographics. The prime age for first-time home buyers is 30 - 35 years old. And recently, there's been a paucity of people in that age group. But soon there will be a lot more.
Brief history lesson. During the Baby Boom, the number of births peaked in 1957. A little more than 4.3 million Americans were born that year. Then births went down slowly until 1964, the last year births were over 4 million. It's no coincidence that there was a housing boom approximately 30 - 35 years later, when all these babies were grown up and ready to buy a house. But after 1964 births continued to go down, until they hit bottom from 1973 through 1976, when births in the U.S. were below 3.2 million. A million fewer prospective home buyers. And when you add 35 years to 1973, you get 2008, when the real estate market was falling out of bed.
But after 1976 births started going up again, as the original Baby Boomers started having children. Births were up to 3.6 million by 1980, and back over 4 million starting in 1989. Add 35 years to 1980, and you get 2015 -- when all the "echo boomers" will be looking to get into the residential housing market for the first time. Of course, it's a long time between birth and home buying, so the correlation isn't perfect, but there's no denying, more births mean more future home buyers.
|The rate of home ownership in the U.S. peaked at over 69 percent in 2004; since then it has declined and is currently at 66.5 percent -- the same as 1998|
Finally, we have to consider shifting attitudes about how, when and if people want to buy a house, as opposed to renting an apartment or living in their parents' attic, or their kid's basement. (Remember Arthur in the TV show "The King of Queens," Carrie's father who lived in the Heffernan basement? Makes for great comedy, but you don't want to be him in real life if you can help it.)
The graph above clearly demonstrates that buying a house was the "thing to do" in the late 1990s and early 2000s, and it has been going out of fashion since 2004. And if there's one thing we know about fashion it's like what Mark Twain said about the weather in New England -- if you don't like it, just wait a few minutes and it will change.
There's only one way all these graphs don't turn around, and that's if America is in a permanent state of economic and population decline. While that's possible -- and given recent news I wouldn't even blame anyone for believing that -- I don't think it's really true. So to me, the only question is not "if" the residential housing market will improve, but "when."