Question of the Year: How can the housing market recover?
As we learned in the 6th grade, Step 1 of the Scientific Method is: Define The Problem. Unfortunately, many seek to place blame rather than simply say what is wrong and find a solution, so I'm going to disconnect blame and cause and simply state - in my opinion - what went wrong and how it may be fixed.
The housing crisis is a product of an unequal balance between affordability and home values. That inbalance was caused by a number of knee-jerk "corrections" that may or may not have been well-intentioned, but as many eloquent philosophers decry - "it is what it is."
Let's re-cap how we got to "is." Over the last 40 to 50 years, home prices rose to the highest levels in history. Fueled by alternating periods of economic prosperity and recession, home prices fluctuated up and down, but mostly up, driven by affordability amongst the masses. The average Joe Homebuyer could pretty much afford the average house. Average wages grew in balance with average home prices. That bell curve we studied in school told us that activity on the low end of the curve/housing market and the activity on the high end of the curve/housing market had little influence on the massive amount of activity that comprises the center of the curve. In other words, low end and high end home sales are a drop in the bucket compared to the number of home sales that fall within the range of the "average home." These are the homes that define the market.
Somewhere within this process of wages growing and home values rising, they got disconnected and out of balance. Government agencies and private lenders determined that "home ownership is good" and began to fiddle with the natural balance of wages and prices. Rather than allowing home prices to track wages in sync, they began offering "special programs" that would allow more buyers into the average home market who earned below the average wage. Mortgage lenders, under heavy government regulation and with full government approval, implemented gimmicks to increase the number of home buyers, such as zerio down payment loans, interest only payments, negative amortization loans, and amortization periods of 40 and 50 years. These gimmicks generated an influx of new buyers who placed additional upward pressure on average home prices and fueled a frenzy of new home construction. In the end, the gimmicks were found to be unsustainable as borrowers defaulted by the thousands, then millions. A return to normal-or-tighter lending criteria led to a massive reduction in the number of qualified buyers, resulting in a massive decrease in demand that led to a massive decrease in home values. It is what it is.
Back to the question: How can the housing market recover? Simply stated, the housing market will recover when average wages and average home prices are once again in balance. That means that either wages (and employment rates) need to grow fast or housing prices need to continue falling. My money is on housing prices remaining flat or falling until wages catch up.
Something else is needed to fuel recovery: liquidity in mortgage lending. Private lenders are not going to invest in home mortgages until they can make a return on their money that is equal to, or better, than other investments available to them. Lenders use interest rate adjustments to mitigate risk, therefore lending at 7% would enable lenders to loosen borrowing criteria to reasonable standards so that more qualified buyers could enter the market. These additional buyers could absorb many of the homes listed for sale at below-market prices, thus increasing the demand for average homes priced in sync with average wages. 7% may not be the magic number, but something in that range is likely to stimulate private money back into mortgage lending, thus providing a reasonable opportunity for the average Joe Homebuyer to purchase the average home.
I yield the soap box, but welcome comments...
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