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
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
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.
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.