The Biggest Factors in a Housing Recovery

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There have been a lot of popular articles recently on the topic of housing. Fool contributor Morgan Housel wrote that he thinks housing is guaranteed to recover. On the flip side of that coin, Fool contributor Rick Aristotle Munarriz argues against him, saying that housing may never bounce back. So who's right? Surprisingly, neither, and in some ways, both.

The problem with both approaches is that Morgan and Rick look at housing with an "overall" view. Although it's tempting to try to lump housing into an all-or-nothing approach, housing, and the recovery of housing, is much more complex. Specifically, I mean recovery is area- and home-type-dependent.

Back to basics
Think about it. How did we get into a housing crisis? Among some of the top reasons were that banks such as JPMorgan Chase (NYSE: JPM  ) , Citigroup, Wells Fargo (NYSE: WFC  ) , and Bank of America (NYSE: BAC  ) (which also bought mortgage lender Countrywide) let potential homeowners take out huge mortgages without doing the necessary work to make sure the homeowners could actually afford them, and often banks lent on a sliding scale -- commonly called an adjustable-rate mortgage, or ARM -- to make the mortgage seem more affordable.

These banks have since had to be bailed out to the tune of billions, and stockholder confidence continues to be shaky. So why were banks willing to take on the risk in the first place?

Demand. People were clamoring to buy homes, home prices were skyrocketing, and banks wanted in on the "easy" profits. Building companies such as DR Horton (NYSE: DHI  ) , PulteGroup (NYSE: PHM  ) , Hovnanian Enterprises (NYSE: HOV  ) , and Toll Brothers (NYSE: TOL  ) , seeing the demand, started quickly building track homes and "luxury" communities -- commonly, and not so affectionately, called McHomes or McMansions -- and for a while, people were snatching them up, despite the overinflated prices.

Then, all hell broke loose. People who shouldn't have qualified for a mortgage started defaulting on payments; ARMs went up, further exacerbating homeowners' inability to afford their mortgages; and last but certainly not least, supply exceeded -- and I mean by leaps and bounds -- demand. Now, here we are, knee deep in a housing crisis.

Look local, Fool
But wait: How does this contradict Morgan and Rick? Simply put: Housing bubbles were catastrophic in some areas, including Stockton and Modesto, Calif., and Cape Coral-Fort Myers and Port St. Lucie, Fla. -- but other areas, such as Austin, San Antonio, and Dallas, Texas; Boulder, Colo.; and Huntsville, Ala., managed to avoid the worst of the bubble.

This is important because areas that didn't see home prices take off to the same degree as other areas didn't have as far to fall when the housing bubble burst. Consequently, these areas are more likely to recover quickly, while other areas could take years or decades -- or they may not recover at all.

The micro, macro view
Another aspect of housing that needs to be considered is the overabundance of houses that are continuing to depress the market. It's no secret that builders went buck-wild for a bit and built way too many homes. Plus, to get houses on the market quickly, builders started building the same house. Over. And. Over. Again. You know what I'm talking about. Communities went up and every other house was exactly the same. The ones in between, well … the layout was simply reversed.

Many of these communities saw home prices fall drastically when housing took a tumble, and for them, the future still looks bleak. Colorado Springs, Colo., one of the areas able to avoid the worst of the bubble burst, still has communities such as Flying Horse, in which housing aspects continue to look dire. For example, a 3,027-square-foot home that sold easily for $463,468 in 2006 is now listed at $349,900, and it's been on the market since 2008.

This problem is repeated and expounded in similar communities across the country. People want to sell, but no one wants to buy, and the supply continues to depress the market.

However, in areas such as downtown Colorado Springs, the outlook is often much more promising. One example is a 1,131-square-foot home that sold for $170,000 in 2006 but went for $284,000 back on April 11.

So why are people willing to pay that amount for a 1,131-square-foot home but unwilling to pay approximately $66,000 more for a home that's almost three times the size?

Location, location, location
The road to recovery is all about location. Downtown Colorado Springs, and areas like it, are seeing the housing market recover at a higher rate than places like newly built-up Flying Horse, and the reasons are simple: quality and limited supply. The homes that were built in downtown Colorado Springs were typically built around the period from the 1900s to the 1950s, and the quality and uniqueness of the homes far surpasses the McMansions in Flying Horse.

Moreover, places like downtown Colorado Springs didn't have the sudden influx of newly built homes -- if you want to buy downtown, you have to buy a house that's already there -- so excessive surplus isn't depressing the market the way it is in other places.

Downtown Colorado Springs is not unique in this recovery aspect. Many people have started gravitating toward smaller, closer-to-town homes as gas prices have increased and people worry about the cost of commuting or utilities for their home. And since the only home you can buy in these cases is an existing home, prices haven't tumbled like the way they have in other places, and hopes for a recovery continue to climb.

Still … not great
Now, don't get me wrong. I'm not saying housing in these areas is great. The market is still experiencing buyer fears that create lower prices and slower sales. But what I am saying is that these areas are seeing higher rates of recovery, and the outlook in places such as these is much better than in McMansion communities.

Housing takeaway
Morgan and Rick are brilliant guys, and I'm not arguing that they're completely wrong. They both make good points: I agree with Morgan that if construction companies such as DR Horton, PulteGroup, Hovnanian Enterprises, and Toll Brothers are able to hold on, they'll see construction start to pick up … eventually. But I also agree with Rick: I don't think things will ever bounce back to where they were before the burst.

However, they both missed a key aspect: The recovery has to be examined on a case-by-case basis. There will be places that bounce back relatively quickly, but there will also be places that never recover -- they were too grossly overpriced to start, and people just aren't going to be willing to pay that kind of money for a McMansion.

What do you think? Is housing recovery area-dependent? Sound off in the comments section below. Or if you'd like to keep track of the companies mentioned here to help gauge housing recovery, follow the links below to add them to your watchlist.

Fool contributor Katie Spence misses living in downtown Colorado Springs. She owns none of the stocks mentioned here. The Motley Fool owns shares of JPMorgan Chase, Bank of America, and Wells Fargo, has created a ratio put spread position on Wells Fargo, and has opened a short position on Bank of America. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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.

Read/Post Comments (4) | Recommend This Article (5)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 21, 2011, at 8:59 PM, mnhorse wrote:

    Katie - I agree with your conclusion on housing but you make the same mistake in discussing (or rather dissing) the banks that you chide others for on the housing market. All banks weren't the same and didn't make the same mistakes to the same degree. If you don't know what that means then do some homework - check out the performance of pools of mortgages by originator for a given vintage and you'll see very large differences. Also, on housing you should note that the banks didn't force all those folks to buy McMansions they couldn't afford - the borrowers in many cases were just as guilty as the lenders if not more so. I could go on and discuss how the feds encouraged/mandated risky lending and how the investment banks (and the investors who now scream they were robbed) were happy to go along. Everything is fine in a bubble market right until the bubble bursts. Don't be so lazy next time - do your homework.

  • Report this Comment On July 21, 2011, at 11:45 PM, jimgetsrich wrote:

    The way to revive the housing market is to lower the prices to realistic levels they would be at today were it not for subprime mortgages and corrupt investment bankers. How to do that? Restore mark to market, make the banks take the hit on their huge foreclosure and put those houses on the market. Yeah, the banks would take a hit but they deserve it and that would stimulate economic activity to the point we might actually have a real recovery instead of the deficit-financed sluggish recovery we have now.

  • Report this Comment On July 22, 2011, at 10:08 AM, thirtyzip wrote:

    There's only one thing that will turn the housing market around, no matter what the invenory, or location, and that's jobs, jobs, jobs. Always is, always has been. Home building follow JOBS.

  • Report this Comment On July 26, 2011, at 8:54 AM, sergeanted wrote:

    It wil take a lot more then jobs for the housing market to turn around . If you have'nt noticed , the economy in almost all areas is in deep doo doo . It may be many years down the road before we see any kind of recovery in the housing market or the economy . One must not forget the governments negative role in these two areas .

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