What If Housing Never Bounces Back?

I'm sorry, Morgan Housel.

I don't agree with you this time.

"Housing is going to recover," my brilliant fellow Fool wrote last week. "It might be years from now, but it's going to happen. You can guarantee it."

He was kind to push out the potential turnaround several years away, but what if that isn't enough? What if even decades aren't enough? What if this seemingly cyclical rebound never materializes because certain demographic trends and supply vs. demand issues continue to work against developers? What if homebuilders will never be great again?

I'm fully aware of the stupidity of what I'm attempting to do here. My friend Morgan is a financial genius. When it comes to macroeconomic issues, he can think me under the table. However, I don't see things his way -- and I don't think I'm wrong.

Too many roadblocks on the road to recovery
What has to happen for real estate developers to bounce back?

Obviously, home prices have to stabilize. No one wants to buy new digs that they know will be worth less later.

We're living that nightmare right now. Real estate data firm CoreLogic reports that nearly a fifth of us owe more on our homes than they're actually worth. For those who figured that there wasn't a problem using a house as collateral to take out second mortgages and home equity loans, that figure bumps up to a spooky 38% of us underwater.

Can it get worse? It can. Noted economist and worrywart Robert Shiller doesn't think the market has bottomed. He says home prices can drop another 10% to 25%.

If you think things are bad now -- and credit agency TransUnion reports that 6.19% of borrowers are at least 60 days late on their mortgage payments -- stick around. Home prices have fallen despite unsustainably low mortgage rates. One can only imagine the doomsday scenario as selling prices head even lower if affordability becomes a bigger problem when rates climb higher.

Lower prices may be a nest-egg-smothering inconvenience for someone looking to sell an existing property that has already been paid off, but it's also a model-obliterating adventure for a developer that has to start from scratch given today's component costs.

Economic recoveries and setbacks do come and go, but what if the housing market at the other end of the bounce looks nothing like the one we left behind when the real estate bubble popped?

Sobering reality
Lennar
(NYSE: LEN  ) took a bulldozer to nine partially built homes two weeks ago. It had acquired the project from a bankrupted developer, and instead of salvaging the eventual McMansions, it chose to raze the property to build smaller, cheaper homes.

Standard & Poor's lowered its corporate credit rating on luxury homebuilder Toll Brothers (NYSE: TOL  ) last week because of a weak housing recovery, despite the fact that Toll has one of the healthiest balance sheets outside of NVR (NYSE: NVR  ) .

This is the reality of the housing industry's future. Folks no longer want gargantuan homesteads in the burbs. Smaller family sizes that are starting to form later are gravitating to revitalized metropolitan areas that swap picket fences for commutability and accessibility.

I'm not just thinking out loud here. The U.S. Census data show that the median age at first marriage is a year and change older than it was a decade ago. The average household size has also declined slightly between 2000 and 2010, and the same can be said for the percentage of households headed by a married couple with children.

In other words, apartment rentals and high-rise condo buildings are becoming the new suburbia.

We just don't need fancy digs anymore. We already have a glut of underutilized existing monstrosities. HomeAway (Nasdaq: AWAY  ) was a hot IPO last week, largely because 560,000 owners of vacation properties are making the second homes that they can't unload available to other travelers.

Pack a passport
If you have to play the real estate market, think internationally. Mexico's Homex (NYSE: HXM  ) and Brazil's Gafisa (NYSE: GFA  ) trade at single-digit forward earnings multiples. Don't kid yourself and compare them to Hovnanian Enterprises (NYSE: HOV  ) , a stateside disaster that posted a wider than expected quarterly loss last week and continues to write down its assets.

Contrarians will dismiss everything that I have pointed out. They'll point out that the rampant pessimism makes this the ideal time to go against the crowd and arrive fashionably early.

Well, it's too late for that. At 2004 and 2007 prices, respectively, shares of Toll and NVR are trading closer to their 52-week highs than their lows, and have you seen Lennar lately? Shares of Lennar have popped fivefold since bottoming out three years ago, even though revenue has fallen every single year since fiscal 2006.

Think about that for a bit. Buyers have ignored the decaying fundamentals, bidding some of the stocks to higher price points than when they were when they were better companies. Maybe they're wooed by upbeat CEOs. I took Toll CEO Robert Toll to task last year because he's been calling for a market bottom seemingly every year since 2006.

Don't believe them. Believe me.

By the time the market does work through the ridiculous excess of existing properties, the undeniable lifestyle trends and permanent lessons learned by scorched condo flippers and property collectors will still hold the housing recovery back.

Real estate development -- in this country -- will never be great again.

Is Rick right? Is Morgan right? Share your thoughts in the comment bow below.

Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.  

Longtime Fool contributor Rick Munarriz will probably move into smaller digs closer to the metropolitan center when he makes his next move. He does not own any of the stocks in this story. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.


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  • Report this Comment On July 06, 2011, at 3:53 PM, chadscards1274 wrote:

    Seriously? My short response is every time someone says it's different this time it never was. There is a big difference between a booming housing market where speculators play and that you might be right it may take a while if ever for that to come back. However, to make the claim that housing might never come back?

    The financial reasons for buying far outweigh renting...relatively fixed payment, tax advantages, the ability to turn your living space into what you want, etc. This sets aside the fact that you can deduct the interest on the loan and normally you can get into home with a loan amortized over 30 years and even with a 20% downpayment the deal still is pretty good, most first time homebuyers can get in for less.

    Trying to predict the future of the housing market barely 2 years into a market recovery...near impossible.

  • Report this Comment On July 06, 2011, at 5:33 PM, bretco wrote:

    Your namesake, Aristotle, would never stick his neck out with such a foolish prediction.

    Its different this time ?

    I don't think so and my vote goes to Morgan.

  • Report this Comment On July 06, 2011, at 5:40 PM, susan400 wrote:

    TIA susan400

    Listen, story is relived and relived. houses depreciate and pay RE taxes, insurance and need roofs. Did you fall for some RE salesman? There are TOO many houses vs what people can afford. RE will slump for 10+ yrs, how can it not? Look at REITS, prices as if there is no maintainence costs.

    Bets shorts in yrs.

  • Report this Comment On July 06, 2011, at 5:57 PM, arieckeg wrote:

    As always it will depend on location. Not to mention the regulatory environment. I wish I could say inovation could drive home sales too, but housingh hasn't been inovative for a century. Why, because it didn't need to be. Regulation, the last centuries invention to control inventory, in most places, helps to restirct supply in most desireable areas to live. Such areas as Hawaii, Seattle, Portland, NYC, Boston etc. Such places have huge pent up demand for housing at affordable prices. And by affordable, I mean the price it costs to build a place to live without the regulatory tax for the right to build. Build a house in Palo Alto for 200k and try to sell it for 300k and see how many buyers you can get!

  • Report this Comment On July 06, 2011, at 6:56 PM, 48ozhalfgallons wrote:

    Thanks, Rick, for your sensible article flying in the face of popular concepts of reality.

    Houses are for private shelter just as cars are for private transportation. Any house of more than 1500 square feet for a family of 4 becomes a symbol for entertaining one's associates. After WWII most families with 3 or more kids were raised in 1200 sq ft tract houses bought with VA or FHA loans secured by jobs with fortune 500 companies in an expanding America.

    Borrowing for shelter must be coupled to one's probability of repaying the loan. Borrowing for more than basic shelter is sheer speculation. Does one make payments on a Lamborghini after putting down a grand?

    I fully expect the interest deduction to be repealed. If borrowing for basic shelter is based on probability of repayment of the loan, then the incomes of those who need to borrow will only be able to claim standard deductions ergo making the interest deduction moot. Want a big house? Then pony up the cash.

  • Report this Comment On July 06, 2011, at 8:02 PM, burlybull1 wrote:

    It's obvious that your last sentence is tongue-in-cheek and that you really agree with Morgan...but the immediate future looks dark and 2 to 3 years seems about right before a recovery.

  • Report this Comment On July 06, 2011, at 8:43 PM, prose976 wrote:

    There is an inherant problem with the housing market. What developers are selling is boxes in regulated neighborhoods. Home buyers have to buy into these small governments called HOA's. With a house, you may get a large interior space, but you get no land.

    Used to be that your home came with a bit of land to grow a garden, set up a basketball course, plant some trees, put in a horseshoe pit, vollyeball/badminton court.

    Additionally, I think it has been made abundantly clear that houses are not worth what we've been paying for them for decades now. The quality is not there. The big ones are called "McMansions" for a reason. The small ones are just "Mc" smaller houses. Everything made in China, cheap illegal labor used. And even as costs have been kept breathtakingly low, the cost of these "homes" kep going up. People were suckered in by greed, and then the government bailed out all the big and small time mortgage crooks.

    People are sour on the idea. When houses are cranked out like burgers at McDonalds and Chinese imports, eventually people are going to realize they're really only worth a dollar or two, not hundreds of thousands.

    Same goes for cars, iphones, computers etc. What a bunch of cheap junk, churned out like swill at a cheap buffet.

    t was great during the runup, but where's my value? I don't get mineral rights, I have nosy neighbors deciding what color I can paint my house, I can't change my oil in the driveway. Come on! There's no real ownership in it anymore. It's like a long lease or rental, except I have to put down a big chunk of my savings for something I could just rent for a pittance comparitively.

    True value for the customer is not being part of the Long Tail. Customers receive cheap and shoddy "value" as a result of the Long Tail manufacturing and retail business. We suckers for the sweet and fast. Are small Hershey bars really worth $1.00? I don't think so. Is a cold soda at checkout worth $1.50? Bottled water $2.00?

    Housing might take a decade to recover when the present college crowd is ready to purchase homes way above their actual values, but I agree with the man who says it's going to be a loooooooong time.

  • Report this Comment On July 06, 2011, at 8:49 PM, TMFBreakerRick wrote:

    hbofbyu, if cup size was directly related to the amount of money that one would would have to shell out in utility costs and real estate taxes, everyone would be trading in Pamela Anderson for Kate Moss.

    How many Hummers and Escalades do you see on the road these days?

  • Report this Comment On July 06, 2011, at 8:51 PM, PeyDaFool wrote:

    prose976,

    It's obvious you've never used an iPhone...

  • Report this Comment On July 06, 2011, at 9:02 PM, FutureMonkey wrote:

    The crunch dampened desire for home ownership, it didn't kill it.

    Does anybody have an alternative to renting or buying. Renters rent from owners, so all homes are owned.

    This is just a wicked cycle. Cycles end when supply begins to exceed demand.

  • Report this Comment On July 06, 2011, at 9:44 PM, TimothyVR wrote:

    You may well be right about the future of the next few decades.

    Housing prices were essentially flat from the end of the nineteenth century until WWII, despite several booms and a rapidly growing population. There was nothing inevitable about rising home prices.

    "Never" is a strong word. But I think your prediction for the next two or three decades may well be accurate. There is a return to apartments and condos and housing is no longer seen as a certain investment - let alone a way to get rich quickly.

  • Report this Comment On July 06, 2011, at 10:02 PM, prose976 wrote:

    PeyDaFool,

    Actually I own an iPhone and I like it alot. But if you notice, we're already on version number 5. There are countless versions of ipods, macs and "i" everything else. My point is that this stuff is made "en masse" and it's made with dirt cheap labor, and people are shelling out 4/5/$600 dollars for each new version, as if they were actually getting a completely newly patented and engineerd hunk of technology. These are just upgraded devices with different packaging, a few new bells and whistles, and consumers are paying "full price" for an upgraded device. That's my take on the iPhone. How does this relate to houses? The majority of them are also made with dirt cheap products, en masse, constructed quickly, with automated methods and cheap labor (in many cases). No land and owners are saddled with HOA costs, etc. In other words, the modern mature consumer is perhaps waking up to the fact that after the meal has been eaten, they've got nothing of real substance. Ever see willitblend.com?" The components of an iPhone can be reduced to a very small pile of dust in no time. Surely we pay for a "rearranged" pile of dust when we purchase one, but remember, all the major expense of design and development have been factored in since version 2 of the iPhone when it comes to the cost for manufacturing it, yet it sells as if they're really doing some intense work to get the next version out. Just an observation.

  • Report this Comment On July 06, 2011, at 10:10 PM, shoemaker17 wrote:

    housing will recover when the home builders build beautiful homes again. this cookie-cutter crap needs to stop. it should be embarrassing that homes built between 1900-1950 look 10 times better than anything built after 1970. oh, and the developers need to give each house more land. looks like a fire hazard how close these homes are to one-another.

  • Report this Comment On July 06, 2011, at 10:34 PM, Rafflesia wrote:

    easy to bump up the real estate market. import 1 million RICH Chinese nationals. They're pushing up real estate prices all over the world.

  • Report this Comment On July 06, 2011, at 10:38 PM, Oriflamme wrote:

    Good case made.

    In addition, the factors that lead the housing bubble are not likely to repeat. The effect of interest rates was noted, and we are on the downslope of the babyboom. Couple those factors with high unemployment and the "internationalization" of the jobs that built the middle-class; the future for a new "ramp-up" in demand for housing looks bleak.

  • Report this Comment On July 07, 2011, at 12:33 AM, Clint35 wrote:

    Rick you make a lot of excellent points. But I think you're wrong simply because you used the word never. Never say never.

  • Report this Comment On July 07, 2011, at 12:38 AM, FreethinkerKW wrote:

    Japan is suffering it's third "lost decade" in housing and the Nikkei. I believe it can and will happen in the USA too.

    1. Rates are at historic lows. When they go back up, people will be able to afford less house, putting pressure on sellers to lower their list price.

    2. People's incomes have not kept pace with inflated housing prices. Prices must fall to reflect this new reality, i.e., the middle class are now slaves to debt which can no longer be financed with EZ Credit circa 2000 AD.

    3. Come October 1, 2011, the FHFA conforming limits for loans (that is Federal housing insurance as set by Fannie, Freddie, et al) is set to fall. Here in Monroe County, FL (the Florida Keys) that insurance will fall from $779,775 (for a home) to $579,775. With the government guaranteeing $200k less in home prices, home prices will fall to an area where more buyers will prevail.

    http://www.calculatedriskblog.com/2011/07/changes-to-conform...

    4. Rents are still cheaper than buying a home. Here in the Keys, $1,500 a month rent can put you into a $750,000 home. Taxes and insurance alone dwarf the rent payments for a comparable home. Condo and HMA fees can also dwarf the monthly rental payments. Then you figure in a mortgage payment on the principal? Still cheaper to rent.

    5. As Rick mentions, more than 20% of all US homeowners owe more on their mortgage than their home is currently worth.

    6. Add in those homeowners owing on second mortgages and the figure is now 38% of all US homeowners are underwater.

    7. Banks are carrying tons of inventory on their books at mark to fantasy prices, not mark to market. In essence, banks are insolvent all over the country, but instead of taking them over all at one time, the FDIC does not want to cause panic (nor does it have enough manpower). Hence, the bleed out will take decades of cuts by paper. Meaning, since the banksters are intent on keeping their bonuses by staying in business, banks are not going to be making loans like they were in the day on NINJA loans.

    8. Which leads me to this: banks are no longer in the business of making loans after taking your deposits for safeholding. Banks, today, are in the business of coverup and taking bigger risks through derivatives, trying to make up for the losses in their off book balances known only to insiders.

    9. Homebuyers and flippers who were burned by the Housing Crash are not going to be playing the American Dream anytime soon. Hence, the pool of possible buyers is dwarfed by the growing stealth inventory which banks are releasing piecemeal so as to avoid panic selling of their fast declining assets.

    10. Demographics are turning against homebuying. As baby boomers downsize and die off, the succeeding generations will have more inventory staring them in the face than those generations can buy. Meaning property values will continue to fall for decades to come.

    Those are just 10 quick reasons why off the top of my head why I believe housing is dead for many more decades to come. There are other reasons I could go into (especially the repeal of Glass Steagall) but it would take up too much time.

    Suffice to say, I am firmly on Rick's side. And I am probably more pessimistic than he.

    The more I read about the banksters and how Capitalism has been destroyed, the more I shake my head at how people still believe in the American Dream.

    I believe Moral Hazard today, 2011, is larger than it has ever been in our nation's history. I also believe the next economic crisis will dwarf the Great Recession.

  • Report this Comment On July 07, 2011, at 1:07 AM, dividendgrowth wrote:

    Once those excess inventories get worked off, we can talk about housing recovery.

    But let me tell you something, housing prices in the US are by far the cheapest in most major countries.

    Here in the US you buy a house with 3 years of household income, in Germany it's 10, and in China 50-100.

  • Report this Comment On July 07, 2011, at 1:37 AM, FleaBagger wrote:

    Maybe I'm just an idiot, but where did Mr. Munarriz say "It's different this time"? And why is it flying in the face of history to think housing prices will continue to go down? Does anybody else here know what a trend line is? Here's one for you:

    http://www.businessinsider.com/richard-koo-house-prices-us-2...

    Also, it's reasonable to expect house prices to overshoot the trend line correction. Everything else in bubble burst mode always has. Is this time different?

  • Report this Comment On July 07, 2011, at 2:34 AM, MrBendix wrote:

    But but but....SUZANNE RESEARCHED THIS!

  • Report this Comment On July 07, 2011, at 6:53 AM, mhonarvar wrote:

    Yea...the population will stop growing....and no one will build/buy new houses.....

    really?

  • Report this Comment On July 07, 2011, at 7:29 AM, BMFPitt wrote:

    It all depends on what is meant by "recovery." I think that inflation adjusted prices will end up just about where we are now when a recovery happens, but that'll be after a long dip below that. And The homebuilders will not be anything like they used to be.

  • Report this Comment On July 07, 2011, at 8:14 AM, Gator626 wrote:

    Let's see, this diatribe full of nothing but hyperbole ("Folks don't want to live in the suburbs? Any facts to back that up with Aristotle?") vs. Mr. Housel's soundly written article with actual data to support his claims? Yeah, let me think about which side to take on this one...

  • Report this Comment On July 07, 2011, at 8:26 AM, SHBecker wrote:

    I enjoyed Rick's article and the comments.

    I don't think you can predict housing or home builders in a macro senses. In certain markets home builders are and will build housing - whether it is condos, town houses or mcmansions based on demand and resources in those communities. People are still building new housing in some markets and will always react to demand. Other communities where there was more speculation may be overbuilt and may not recover for decades - think Las Vegas.

    So I think homebuilders will make money but will not have a return to the glory days of the last decade. Some home owners will never recover and others will never be hurt. Real estate is local. Remember the old real estate maxim - the three most important things in real estate - location, location location.

  • Report this Comment On July 07, 2011, at 8:59 AM, TMFBlacknGold wrote:

    While real estate may be cyclical, I tend to agree with this article. Housing prices were artificially bumped up by the government for decades. The government message that "everyone should own their own home" and absurdly cheap credit are, at the basic level, what caused the financial crisis.

    While everyone is always touting that housing prices are lower than a few years ago, they seem to forget that housing prices should have never been that high to begin with. Current housing prices aren't low, they're simply where they should be.

    Will real estate become an attractive investment again in the future? Hopefully, probably. Will housing prices increase to artificially high levels again? Not anytime soon.

  • Report this Comment On July 07, 2011, at 9:57 AM, djemonk wrote:

    I don't see him saying that it's different. In fact, I see him saying that it's NOT different. He's looking at large-scale demographic trends (ie, the greying of the baby boomers). He's 100% correct there and this is not a new situation.

  • Report this Comment On July 07, 2011, at 10:12 AM, poach wrote:

    Rick makes a lot of good points about why housing recovery is weak, a lot of the data that he adds as evidence should be compared with what it was a year or at the peak to allow us to interpret whether there are signs of improvement or not. He also does not answer his own question or prove his hypothesis about why the market will never recover for years and if so how many? two, five or ten. That should have been addressed.

    There was an interesting chart in the WSJ yesterday, that housing prices have come back to their long term (30 year) trend. The long term trend from the US Census seemed to suggest that home prices grow at close to the annual inflation rate of 3 % per annum.

    Again like Rick, we can't conclude that coming back to the long term trend means housing prices have bottomed. Instead I would wager that investors would seem emboldened to buy at these levels and if I had money Yes, I would be in the market looking for distressed properties.

    poach

  • Report this Comment On July 07, 2011, at 10:23 AM, TMFKSpence wrote:

    I strongly believe that it depends on the area. If you bought in a track development, the so called "Mc" houses that we're grossly overpriced and built on shoddy material, then yes, I can see that taking longer to recover, or not recovering at all.

    However, I bought a house that was built in the 1930's, remodeled it, and it's actually appreciated by $23,000 since we bought it towards the end of 2007. Why? Because we bought in downtown Colorado Springs, and the area itself didn't have skyrocketing appreciation, so there wasn't a "bubble" to burst. Granted it's become harder to sell because of housing fears, but in my area, homes are selling, and they're selling for more than in 2007.

    I think in areas like that, you'll see higher demand because people are buying quality: the homes were built with solid materials, the homes are appropriate sizes for families, they have land and quite neighborhoods, and they're in convenient locations.

    My point is this: there is no "one size fits all" approach to housing. It depends on the area, and the houses themselves. As people start to realize the value of quality, areas like mine have gone up. Plus the supply is limited which has kept home prices stable. There are lots of areas like mine accross the U.S., people just need to get smarter about what they buy and where, and builders need to go back to building more custome homes instead of track "homes."

  • Report this Comment On July 07, 2011, at 10:25 AM, JeanDavid wrote:

    Perhaps the housing prices have already bounced back -- to where they should be. People hoping prices will return to their bubble prices are crazy. There are two sane ways for prices to return to those levels without too much of a bubble. One is for inflation to lower the value of the dollar so that more dollars are required for people who have them to buy up all the surplus housing. Not that there are no homeless people who need housing; there are. But most homeless are in no position to buy houses, so tough luck for them. So the other way for them to go up in price is for the number of people with money to buy houses already existing. Only once those are bought up will housing prices increase in any sane way. Supply and effective demand. Too bad the homeless are not part of the effective demand for houses.

    There is little point building houses until all those on the market, and all those stockpiled by banks reluctant to forclose on houses that are already behind in mortgage payments.

  • Report this Comment On July 07, 2011, at 10:26 AM, FreethinkerKW wrote:

    <b>It all depends on what is meant by "recovery." I think that inflation adjusted prices will end up just about where we are now when a recovery happens, but that'll be after a long dip below that. And The homebuilders will not be anything like they used to be.</b>

    There are mansions in Palm Beach, FL which have yet to return to their 1928 bubble highs. Keep in mind the 1928 housing crash was Florida specific, whereas the Housing Bubble of 2000 was nation-wide.

  • Report this Comment On July 07, 2011, at 10:39 AM, TMFBlacknGold wrote:

    TMFKSpence is right. It is an area-specific problem. For instance, I remember hearing that here in Pittsburgh housing prices grew about 4.6% this year. Some places were fortunate enough to miss the bubble.

  • Report this Comment On July 07, 2011, at 10:55 AM, Dewmaster68 wrote:

    No question it will be many years before housing ever recovers. Between the governments debt, over building, inventory of homes not sold or in foreclosure, banks sitting on tracts of land they must unload at some point ( which will be when the government stops paying them interest on these assets) the future of housing is blink at best. There is just too much garbage in the system that must be flushed out before any sort of recover is a realistic and that will take years and years. The government is subsidizing the banks by paying them the interest on the " toxic" loans they took over and guaranteeing them 80% recovery of the original loan amount. So, until all of this clears itself, there will no recovery in the home building business with the exception of the RENTAL market. The economic market needs a complete colon cleansing.

  • Report this Comment On July 07, 2011, at 11:02 AM, poulinkj wrote:

    Housing will recover only when the average person can afford the average mortgage. I don't see that happening any time soon.

  • Report this Comment On July 07, 2011, at 11:12 AM, wrenchbender57 wrote:

    Rick makes some good points. Could it be that the past housing booms where driven by financing model that no longer works? I do think that housing will eventually recover. But, it depends on your definition of a recovery. Homes need to be affordable for the average person. Not necessarily single family homes, but homes in general; condos, apartments or whatever configuration works for families. And we should not depend on another financial bubble to make the numbers work. It may indeed be a long time, if ever, before the home builders of the past ever make the returns they were used to during the last bubble.

  • Report this Comment On July 07, 2011, at 11:17 AM, wrenchbender57 wrote:

    The current market could be a boon for downtown development in some cities. That is, condos, apartments, etc. built and sold to the middle class.

    Close to work, grocery stores and so on. Less time commuting, less fuel consumption and affordable homes. Won't likely happen in New York or Chicago. But in smaller towns outside the major cities I think this is a real possibility.

  • Report this Comment On July 07, 2011, at 11:48 AM, IowaReino wrote:

    I bought my home for $179K. It still appraises for that, is in excellent condition, but won't garner that price because every other broke SOB is discounting their house, dragging my value down with them. PLUS, I hear Obama's healthcare plan includes a tax of 3.8% due on your sale price, beginning AFTER the election, so we won't find out until we return those idiots to congress. Call me Phillips, cause I'm screwed.

  • Report this Comment On July 07, 2011, at 12:04 PM, XMFDRadovsky wrote:

    It used to be thought that a man's home was his castle. Today it is more like a man's home is a millstone around his (or her) neck. At least that's what it is for those who are underwater in their dream homes - or worse - lost their homes to foreclosure.

    I think the bigger point to be made here is that one part of the so-called "American Dream" was to own your own home. The recent crisis has show that dream to be more a nightmare for many.

    I agree with Rick somewhat: the single-family home housing industry will not get back to the levels it has been at in the past - as long as the nightmare aspect is remembered. But the population is growing and people do need places to live - affordable places, which means multifamily structures and more renting rather than buying.

  • Report this Comment On July 07, 2011, at 12:14 PM, GoodyearGirl wrote:

    Rick's observations are right on. Everywhere I go I see more & more "For Sale" signs; Las Vegas, San Diego, Phoenix, Pebble Beach, Carmel. Many people no longer want to own second homes. It was a good idea when we were in a "bull" housing market but now just a drain. The average person has many more jobs and marriages than in the past so people are not staying in one place as long making ownership of a primary residence less attractive. There will be more landlords and less homeowners in the future.

  • Report this Comment On July 07, 2011, at 12:23 PM, wyrdmage wrote:

    I enjoyed this opposing view to my own view so that I could be exposed to ideas that I had not considered. I believe that the housing market will recover to previous levels, but I don't believe that the rate of appreciation will return to what it was.

    Until I bought a house, I was convinced that renting was the best way to live. My rent was raised every few years, but even with the price declines the house I own is now worth more than it was 10 years ago. Combine that steady cap on the payments with my interest deductions and I have been able to more than pay for the insurance, taxes, new roof, etc. My landlords were great but never perfect, and now I have the perfect landlord (me) and the freedom to do or not do anything I want with the house/yard. Best of all, I can attain full ownership some day and be free of monthly payments...while the spectre of eviction never leaves a rental.

  • Report this Comment On July 07, 2011, at 12:37 PM, snapperreef wrote:

    Depends on what is meant by recovery. If you mean a building boom similar to pre 2006 then never is correct. The only way for such a recovery to take place is for lending institutions to again lend money to people who cannot repay the loan, eg. Freddie & Fanny.

    If you mean the market hits a bottom, foreclosures take place, banks take losses, and government stays out of the way then eventually time and the birthrate will create a demand for housing at some level. This level will be much lower than that of the boom days and houses will be much more difficult to afford and to acquire.

    Will this bring politicians back crying that "Houses are only for the evil rich." Will they then start anew at trying to buy votes with houses, and at what cost to taxpayers?

  • Report this Comment On July 07, 2011, at 12:37 PM, CluckChicken wrote:

    "I agree with Rick somewhat: the single-family home housing industry will not get back to the levels it has been at in the past"

    I am going to assume you mean very recent past. This is a great chart that suggests that we may in fact be heading to the levels it was:

    http://www.ritholtz.com/blog/2008/12/classic-case-shiller-ho...

    Of course each market is different. Some have seen small drops in housing prices, some have seen an up tick, some fell off a cliff.

  • Report this Comment On July 07, 2011, at 12:52 PM, hbofbyu wrote:

    Many of these arguments are over-complicating the issue.

    1. Is the population of the US growing (immigration)? Yes.

    2. Will they need a place to live? Yes.

    3. Will more apartments/houses/condos be built? Yes.

    4. At what point will the future demand meet the current, over-built supply? That is the question that needs to be answered. And, as has been mentioned, is very local. You can't build a house and ship it across the country.

    Someone will be building and buying houses in the future. Even if it is only the rich foreigners. Don't assume that prices have to drop to meet the average American's dream of home ownership. Look to Europe and the high price of housing. That may be us.

  • Report this Comment On July 07, 2011, at 1:45 PM, inparadise wrote:

    <<We just don't need fancy digs anymore. We already have a glut of underutilized existing monstrosities. HomeAway (Nasdaq: AWAY ) was a hot IPO last week, largely because 560,000 owners of vacation properties are making the second homes that they can't unload available to other travelers.>>

    While indeed in some locations like Orlando FL some owners have thrown their property into the vacation rental (VR) industry due to lack of sale, the primary reason why so many people are adding their homes to these listing portals like HomeAway has more to do with the increase in VR popularity. People see their neighbors having their vacation home paid for, possible through the self-management allowed through these internet rental portals that allows the owner to avoid 25-50% management fees.

    If you have ever stayed in a vacation rental, you'll never go back to a hotel if you have the choice. It's been our way of vacationing for the past 11 years, and we are actively bidding on a property to use as a VR, with positive cash flow and a good return on equity.

  • Report this Comment On July 07, 2011, at 2:51 PM, plange01 wrote:

    home prices still have a long way to fall and will not reach bottom for more than a year.real estate is still by far the worse investment possible.prices will slowly rise but it will be more than 20 years before they get near recent highs.removing obama from office now is the only chance to keep america from a major collapse that will add years onto the recovery......

  • Report this Comment On July 07, 2011, at 3:18 PM, SN3165 wrote:

    So, what is everybody's take on investment real estate (not personal?). Is anybody personally waiting for housing to crash or hit a bottom to snatch up some cash-flow real estate?

  • Report this Comment On July 07, 2011, at 3:22 PM, 11x wrote:

    bretco, it was Aristotle who insisted the earth was the center of the universe, so it wouldn't be the first time an Aristotle had it wrong (Aristotle is only this person's middle name, so who knows if there is any lineage).

    The real estate market will recover. It's only a question of when. And that is anyone's guess. I feel we are closer to the bottom than the top and the bottom should be within 1-2 years, but it depends on the economy. What corporations lack today is confidence. If America will get out of this recession and show prosperity in the years/decades ahead, of course real estate will recover. Population growth will continue.

  • Report this Comment On July 07, 2011, at 3:35 PM, CluckChicken wrote:

    "The real estate market will recover. It's only a question of when."

    Think that question should be where not when. Using this: http://www.realtor.org/research/research/ehsdata

    You can see that a few places have avg price increases year over year while couple are about flat and then others are doing poorly. With real estate it will always be "location, location, location".

  • Report this Comment On July 08, 2011, at 1:06 AM, burningdaylight2 wrote:

    I own 5 rentals. They provide an effective tax shelter to my professional income. I'm with Housel on this one

  • Report this Comment On July 08, 2011, at 8:01 AM, egabriellemoranU wrote:

    Housel all the way. As a GenX-er, I can only really speak to the psychology of my peer group. Simply, our American dream doesn't include anything about a house, and certainly no white picket fence. Three important shifts that will permenantly reduce demand for houses:

    1. One big justification for buying a house is "I wanna have room to entertain guests...have all the guys over to watch the game.." Sure, this still happens, but with ALL of our entertainment needs with us EVERYWHERE we go (iPad, smartphone, etc.), it isnt necessary to have a "space" dedicated to entertainment.

    2. That whole educated women have fewer kids thing is true, as Rick mentioned. Thats a trend that's only going to continue. Kudos on climbing the ladder, girls!

    3. Mobility, mobility, mobility. It's not just a talking point - almost everyone I know wants to work outside the US at some point in their career. And, virtually without exception, we're all willing to move to where the work is. Housing bears the downside of our "seize every opportunity" mentality.

    4. People are working more hours than ever (those who are employed, i.e. the most likely candidates for house purchases anyway) in response to the increasingly competitive workplace. Who cares about a house when you hit the pillow the moment you walk in the door?

    For the record, house buying is no where on my life-goals list. But it was for both of my parents, aunts, uncles, and grandparents. But maybe I'm just odd..

    Elizabeth

  • Report this Comment On July 08, 2011, at 8:03 AM, egabriellemoranU wrote:

    Wow, that's a confusing one. By Housel all the way, I meant Rick. But you're still fabulous, Morgan!

  • Report this Comment On July 08, 2011, at 9:55 AM, hrnsindy wrote:

    The housing will never be the same. We paid 277k for ours 9 yrs ago, its worth 250K. We owe $222.

    We live in Indiana, my husband works in Texas. We can't sell, we cant move, and we can't buy.... we are stuck with commuting...the new future?? Yes, I believe so.

    Just like in the depression, people will go from job to job. Have a home place...and make it work.

    We don't worry about the housing market anymore, we have job, we eat, we are saving. We do our best.

  • Report this Comment On July 08, 2011, at 12:21 PM, JAVEROA wrote:

    Unless you solve unemployment, there will be no solution for housing.

    Rates can go down, but if unemployment is down as well, then few would risk investing in real estate.

    Rates are important but it is relative to what the economy is doing and whether more people find real job opportunities.

    In that respect, noone is talking about underemployment - this is hardly ever picked up in unemployment figures, but it is extremely important for the real purchasing power of the population and the increasing lack of certainty inherent in a job where, e.g. an engineer is forced to accept to work in a position where his/her skills are underutilized and the compensation s/he gets is far below what s/he is used to. S/he will still be counted as employed, but will be underutilized, underpaid and worst of all feel negative about everything.

  • Report this Comment On July 08, 2011, at 2:02 PM, decebalvs wrote:

    There are too many variables in this equation (even more than usual), which makes predicting this extremely difficult.

    1. The value of the dollar

    2. Gas prices, affecting commuting trends

    3. Industries placement, affecting income levels of various areas

    4. Gas prices, affecting building cost

    5. Cultural/expectations changes as pointed out by Elizabeth and prose976

    6. Gas prices, affecting food prices, affecting demographics (esp immigration)

    7. Future legislation

    I bought a house last year, and I am not happy with the total outcome. It's going to take a long time to get even, and I don't think I want to stay so much time around here. Lots of hidden expenses, risks, and downright disadvantages, that was impossible to know beforehand. I avoided HOAs, fortunately.

  • Report this Comment On July 08, 2011, at 2:46 PM, bidearly wrote:

    Interesting points, all. However, you are missing a key ingredient of the demand side of the equation. Look at our best universities: they are recruiting more and more candidates from overseas. Why? Because those people must find their own cash to attend those schools! Its about the money! As one person pointed out: our housing is much cheaper than overseas housing. When the foreigners graduate from our best schools and are recruited into high paying jobs locally, THEY will be the new homeowners in suburbia. House prices will go back up again, but the look and feel of our suburbs will change, possibly forever.

  • Report this Comment On July 08, 2011, at 5:40 PM, Gregeph wrote:

    Household creation will eventually work off the excess supply that currently exists. This is inevitable. The question is not "if it will happen" but "when". This is a macro forecast which is difficult, if not impossible, to make.

    Remember Buffett here: economic forecasters give astrologers a bad name. To be a successful investor you need to focus on that is important AND knowable. That is your sweet spot - your edge.

    Let the other guys spend his time and capital focusing on what is important AND UNknowable. http://gregspeicher.com/

  • Report this Comment On July 08, 2011, at 11:43 PM, ETFsRule wrote:

    "FleaBagger wrote:

    Maybe I'm just an idiot, but where did Mr. Munarriz say "It's different this time"? And why is it flying in the face of history to think housing prices will continue to go down? Does anybody else here know what a trend line is? Here's one for you:

    http://www.businessinsider.com/richard-koo-house-prices-us-2...

    Also, it's reasonable to expect house prices to overshoot the trend line correction. Everything else in bubble burst mode always has. Is this time different?"

    FleaBagger: The post you linked to only implies that house prices will decline until 2013. That's basically the same thing Morgan said. Just a couple more years before it starts to recover.

    That "trend line" can't continue for a very long amount of time... unless you think house prices will eventually turn negative.

  • Report this Comment On July 09, 2011, at 9:12 AM, kurtullman wrote:

    People seem to be ignoring one of the big demographic inputs. Up until the hooha of the early 2000s, most of the growth in housing was brought about by excess demand of the excess people in the babyboom generation. As they rotate out of family housing and are downsizing, there are not enough follow on people to keep housing prices up. The fall in housing prices was inevitable and the idiocy of the bubble only sped up the declines (both because of speculative overbuilding and the ensuing economic problems that took away even more demand because the younger set can't afford to buy).

  • Report this Comment On July 09, 2011, at 9:58 PM, MossyTrail wrote:

    I have two things to say:

    First, James Howard Kunstler has been predicting this for awhile now. People think he's some kind of nut, but if that's the case, why have some of his predictions begun to come true?

    Second, if housing never bounces back, then maybe schmucks like me will actually be able to AFFORD our own home someday. Let homes be like Foolish stocks: wait for the bargain basement price, then buy and hold. You see, some of us are just crazy enough to see a home less as an investment, and more as a place to live free of meddlesome landlords and restrictive leases. (As you might imagine, I would never buy a home in a neighborhood with restrictive covenants -- it would be like a lease agreement all over again, which is precisely what I would be trying to avoid by buying my own home.)

  • Report this Comment On July 09, 2011, at 11:33 PM, 1spring wrote:

    one can hope housing doesn't comeback: we are addicted to eating farms and puking out stick houses. But it will... in a way that reflects some of the real forces in this text.

    We will again reinvent ourselves. As the estates of the golden age gave way, mcmansions have. (If you have one, sell it).

    And don't invest in yesterdays dream.

    Look instead for energy positive community plans, etc, with small units clustered. Investment that are adapted to new realities.

  • Report this Comment On July 10, 2011, at 4:47 AM, JeffersonsGhost wrote:

    Larry the Cable Guy has this unique perspective on the American Condition when he says "I believe that sometimes you have to wreck the truck, to collect the Insurance, to make the Truck Payment". Absurd as that sounds in this discussion I actually believe this uniquely American perspective has an application in the current Real Estate Bog.

    It may well be that Banks and other Real Estate Investors need to purchase entire subdivisions, raze every other house, double the minimum lots size with the local zoning board, so that another house cannot be built on the recently razed lot for at least 20 years. Deed the newly vacant lot to an adjacent property owner and thus decrease the supply of homes in these mega subdivisions by 50% and theoretically driving prices of up in these same subdivisions. Lower Supply = Higher Demand = Higher Prices...

    ABSURD? Think about this, If this had been done 5 years ago, we would now be out of the housing slump and probably out of a global economic meltdown, and the Real Estate losses would be less than what they are now stacking up to be.

    If the housing boom of the past 10 years has created a self perpetuating declining market due to Functional Obsolescence attributed residential lots the size of postage stamps, the only way to cure that is to do exactly as I have suggested, perhaps even on a greater scale. Rather than doubling the size of some lots, perhaps tripling or quadrupling the size of the lot may be in order.

    When a property does not afford the owner the space required to plant a and grow a garden to produce food for the family it is essentially a no brainer, this property is functionally obsolete before it is finished being built, and you wonder why the demand for these postage stamp Real Estate Parcels is non existent?

  • Report this Comment On July 10, 2011, at 7:59 AM, Foremanscotty wrote:

    Rick's right on one level, wrong on another. He's right the market won't come back, at least the way it's done in the past. He's wrong in that a trend toward urban living will manifest, or is sustainable. Some notions are true and yet can't be proven. Some notions can be proven, and are true, but unbelievable.

    The housing market won't come back until we, as a nation, arrive at a collective understanding of what a toxic house is. The houses 99.999% of the developers are putting on the market are "sick" houses. Not just toxic in the sense of outgassing, but toxic in the architectural layout.

    Everyone's heard of Feng Shei. But few have heard of the most ancient of all architecture, Sthapatya Ved, from which the principle of proper Vastu comes. House orientation with the rising and setting sun, and room positions are critical. This can be proven, statistically. I'll stake my reputation that anyone can look up any housing related database, be it foreclosures, insurance claims, 911 calls, divorces, etc... and find more than a statistically significant correlation between compass orientation, just one of the principle requirements of Vastu, and the quality of the event.

    I think this is a notion that is true AND can be proven, statistically, with no need to introduce a construct, or theory, to explain it. It is what it is.

    Regarding a move to the city; that's no more sustainable than propping up the economy with taxpayer derived banking supports. The whole media-driven wall street herd mentality also drives such false ideas. Rather, the inevitable trend will be towards agricultural communities, which, if you check farm land price movements, you'll agree.

    Call it a third world America if you want, but moving to the country doesn't mean a loss of entertainment or amenities, no. Urban entertainment and amenities will follow. The additional value of the endless variety of entertainment nature provides is there for all. Did I mention 5 minute commutes?

  • Report this Comment On July 10, 2011, at 9:19 AM, Eds502 wrote:

    Cash Flow is what should drive a market. In 2006 people were buying properties that cost them several times more to own then to rent. Not rational. An investment is valued on your rate of return. The biggest current risk to value is real estate taxes. Some markets used to have tax rates that would equate to 1 or 2 months rental income. Those rates now equate to 4 or even 6 months rental income due to over assessments that the government does not want to give up. That drives cash flow and values down. The true non speculative value of a property with no cash flow is zero. Current equalization is not in rising rents but in falling values. Recovery is only possible if local and national ecomomies catch fire driving up population, demand, and cash flow.

  • Report this Comment On July 10, 2011, at 9:20 AM, Eds502 wrote:

    PS Lowering the real estate tax burden would increase cash flow and support the market.

  • Report this Comment On July 11, 2011, at 12:45 AM, BFil wrote:

    By 2050 the USA will have an additional 100 million people.

    I am guessing that a good number will want a house.

    So this discussion is really only about timing.

  • Report this Comment On July 11, 2011, at 11:58 AM, tom2727 wrote:

    I certainly wouldn't touch homebuilders right now. I agree that from a macro perspective, the housing crash is far from over. And interest rates have nowhere to go but up.

    But for investing in real estate (buying your own home or a rental), it is ALWAYS local. Good friend of mine just bought a rental home for around 150k. Tenant is in place, and he's netting $800 per month with 20% down on a 30-yr mortgage (including taxes and insurance). If the price of the house goes up, that's gravy. If it goes down (assuming rent also drops), well he's got a lot of cushion before he's losing money renting.

    There are deals to be had for real estate investors who know what they're doing. Why do you think we have so many houses being purchased for cash nowadays? Investors are snapping up foreclosures and renting them out. I just wish housing would drop where I am. I'm still renting, even though I could easily afford to buy.

  • Report this Comment On July 11, 2011, at 1:27 PM, bd2469 wrote:

    It is always dis-heartening to read these types of articles. It just keeps the negative sentiment going. I think it is unfair to point out the Shiller thinks housing prices can drop another 10% to 25%. That is only partially the truth. Shiller said that a drop like that was only marginally possible and that it "wouldn't surprise" him, and went on to say that a drop like that was not his forecast.

    Prices will certainly go back up in almost all places. Let me give you an easy example. In Phoenix the average median price of an existing home has fallen to $115,000. However, the average price of a new home is $225,000. In other words, builders are building homes as cheap as they can right now at they are still $100,000 higher than a resale. Existing home inventory on the market is less than 6 months (and less than 3 months in many submarkets). Yes, there are still some foreclosure/short sales to work through but that inventory is declining substantially....but no one likes to pay attention to that.

    When the existing inventory is purchased what are people going to buy? If they have to buy a new home then you will see a substantial increase in prices. It may take a while to get there -- that is the tough part about this market. But people will continue to move to Phoenix when the economy gets better (we were the 2nd fastest growing state from 1990-2005) and those people will need a place to live. The cost of renting is now at historical highs versus the cost of owning - exactly the opposite that it was in 2005/2006.

    Yes, housing prices will recover, it just may not be as fast as we would like.

  • Report this Comment On July 11, 2011, at 2:10 PM, 123spot wrote:

    Of course, Morgan is right. Freedom and ownership are in our blood in this country and we will always seek our own homes (as opposed to merely houses). This will not change because of this recession.

    Perspective from a 50 something.Elisabeth, I do not envy your Gen-xer dream and scheduled overworked and migrant reality as you describe it. In fact, I see many Gen-yers rejecting it in that they plan a great deal of time for themselves and do not exhaust themselves driving to be rich. Maybe I'm just trying to make myself at 56 feel better about living on a farm in the Ozarks for the past 28yrs, paying it off, maintaining it, paying taxes and insurance still and really never planning to sell it regardless of what the market will bring. Every morning when the sun rises over my porch and every evening when it sets over my bed, I watch the world spread out in front of me like a quilt.

    I bought the land first, then built my house and barn with each paycheck over three years. My mortgage on the land was at 10% , so I saved and paid it off with cash on my 40th birthday. I also own a small rental house so that the rent covers costs at my home and for the rental house with a little left over. See, all of this can be done without sacrificing your life every minute of your day.

    Oh, and I live an hour from an airport that can take me to Boston, Chicago, NY non-stop. I go when the city has something special to offer. My friends in the city cannot access peace in a weekend by flying the other way. Someday life can be less frantic for you without giving up all the excitement along the way, but you have to plan for it.

  • Report this Comment On July 11, 2011, at 2:30 PM, 123spot wrote:

    Just to bore you alittle longer, Elisabeth (because I have re-read your message to see what else made you and your peers reject the dream of a home, or house as you call it. During the time above, I worked 6 months in Switzerland, 5 months in El Salvador, and a year in Nassau, Bahamas. I stream Netflix, have fast broadband and an iPhone, and a totally naked pool party every once in a while just because I can. You don't have to give up much to own a home .You're not "nuts", you're just limiting yourself because the world is kind of crazy right now so that having a career at all seems to require everything. Hang in there and plan your future while you work so hard today. Oh yeah, the no kids thing has helped me a lot. But I am a wonderful aunt with a beloved kids' hideaway which they run away to regularly : ).

  • Report this Comment On July 12, 2011, at 12:21 PM, ikkyu2 wrote:

    I'm with Cliff. Never say never.

    I can envision a world where there aren't any iPhones - because something more clever came along to replace them. What would that be? I dunno - I'm not that clever.

    Now I'm trying to envision a world where people don't need shelter to live in. That's right, they don't live in houses, don't live in apartments. Something clever came along and made that unnecessary - ?

    Nope. Don't think so. People will always need somewhere to live and other people will always make a profit on it.

  • Report this Comment On July 13, 2011, at 1:58 PM, NeuroProf wrote:

    I'm with Morgan, sort of. Smart investors see the real estate pummel as a great buying opportunity. Prices are low and rents are high because mortgages are harder to get. Buying low and renting your property is akin to investing in dividend paying stocks with special tax advantages ! The money keeps rolling in, but you have real value in the end AND you don't have to rely on honest corporate reporting. You know the financials, so nobody can lie to you about it. I think a good diversified portfolio has some rental real estate in it. Oceanfront is the best investment we have ever made, despite the downturn in property values.

  • Report this Comment On July 13, 2011, at 8:33 PM, lucrativecoin wrote:

    So let's see. Next year is an election. Obama will probably lose if the unemployment rate is this high. How can it be fixed? He needs housing and the construction jobs to come back. Does he have some things he could do that would fix housing. Yes. I predict they start tinkering with Fannie & Freddie as described in this article:

    http://online.wsj.com/article/SB1000142405270230458440457644...

  • Report this Comment On January 28, 2012, at 5:06 AM, f00dl3 wrote:

    I think the reason that house prices got so out of control is because everyone loved credit. The more debt you have, the more buying power you have.

    Society was under a general impression that your house is a great way to consolidate debt so you can afford to take on even more debt. When the market finally burst in 2009, people realized that maybe having actual cash is better. Until society gets to a point where people actually make a half-effort to save some money and pay off those credit cards, the housing market is going to keep failing.

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