the apparent truth on this point ... from
(snip)Can the US economy recover without a recovery in housing? The answer is yes -- and you are just going to have to be willing to accept that the value of your home today is much closer to its true value than, say, the value of it in June 2006.
The "mental correlation" is fairly obvious. For most people, their single largest asset in dollar terms is their home – whether you include only the equity or the entire value. It is a key part of the equation of how the average American assesses his own wealth position. The more confidence the average American has in the value of his home, the more likely that confidence will translate to increased spending on other discretionary and non-discretionary consumer purchases.
The actual data correlation between the housing and economic recoveries is reasonably accurate also. Several recent recessions in the last 20 years have seen housing lead the way in powering out of the recession. Just look at the growth of Home Depot (HD) and Lowe's (LOW) in the last 20 years. The growth in home building and housing has been a big boon to the US economy for 20 years, so of course the data "looks" like it shows an industry leading the way out of recession.
But the question still hangs out there: Can our economy recover nicely without a housing recovery? The recent economic data already shows a recovering economy, but housing data doesn’t represent any meaningful part of that recovery or growth. There are really no economists predicting a housing boom or recovery any time soon, and yet the economic data has been reasonably reassuring of late (I stress the word "reasonably").
So the question persists: Are we breaking the mold here? Are we going to recover without the housing market recovering? I think it depends on what everyone means by housing "recovery." If the average person thinks that recovery means we are going back to the 2006 peaks in housing prices, then the answer is clear: We will not have a recovery. How far do housing prices have to rebound to feel like a recovery has occurred?
I think the answer is not what most hope for. I think the current prices for housing are very close to the new normal. There will not be a meaningful move up from these prices in the next five years. In fact, prices will likely continue the drop before they go back up. But I think the economy will continue to recover, and the recovery still has the potential to be strong despite a drag from housing.
I think the new normal has already started settling into the psyche of both consumers and investors. I think home owners have realized that housing prices increased too far in too short a time period. I have placed the S&P/Case Shiller Home Price Index since Q1 1987 below:
Just look at the slope of the two trend lines. The green line looks like the line of the trend in the late '80s and early '90s just continued: normal 3% growth in home values. The red line doesn’t really share any slope characteristics with the rest of the chart. Of course, we know the the ill-fated laws that our Congress passed, which drove the housing bubble, started in the mid-'90s and really took hold in the late '90s and early 2000s.
The conclusion: Housing is not going to be part of this recovery. The bubble was artificial – and can’t be restored. But the new housing-value normal will settle in to the psyche of the average consumer and investor. It won’t be an impediment to the US economic recovery – it just won’t be a help, either.(snip)
The author's point of course is that the entire 2000's escalation in home values was an abberation ... that cannot / will not be repeated ... and that housing prices are just now starting to return to their long term 'mean'.
However, another point unmentioned by the author is that there are arguably 2 million US homes already 'overhanging' the market ... i.e. foreclosed homes owned by banks, etc. that are not actively being marketed ( because doing so would force said banks to book actual losses ). If 'dumped' back onto the market, as they eventually must be, real estate prices will be depressed even further. This strongly implies that US housing prices will 'undershoot' their long term 'mean' over the course of the next couple of years, as was the case following the early 90's 'recession'. And this will be even more the case given that another 2 million homes are already somewhere in the foreclosure pipeline, thus eventually being 'dumped' onto the market as well.
While all of the above information exclusively concerns the 'supply' side, there are also new variables on the 'demand' side. One of these is the existance of an unprecedented amount of student loan debt ... repayment of which is taking precedence over starting families and assuming home mortgages !!! Another one of these is new regulations requiring that the actual incomes of would-be mortgage seekers must be verified, as well as new regulations requiring that would-be mortgage seekers actually post a significant down payment. Thus the expected 'undershoot' may wind up being longer and deeper than in previous real estate 'cycles' ( the author mentioned 5 more years ).
The arguable moral of the story is that real estate 'bargain hunters' will probably find better bargains next year than this year, and even better bargains the year after that !!!
The softly spoken point of the story is that 'average' American homeowners will be worse off next year than they are this year, due to the ongoing loss of value of their primary 'investment' i.e. the family home, and even worse off the year after that.
The author's arguable larger point is that the US economy has in fact entered a 'new normal' ... which has permanently reduced US housing prices. The argument can be made that a 'new normal' also now applies to US unemployment rates, US wage / pay scales, US food / energy prices, etc. ... and thus has permanently reduced the US standard of living for 'average' Americans.




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