Nov 20 2006 12:00AM | Permalink | Email this | Comments (1) |
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Sure it will, but it is likely to be many years from now. First, we have to absorb today’s surplus of available homes, a slow, frustrating process that will take at least six more months and maybe a year. Then, the attitude about the role of housing in our lives has to return to what it was in 2004-05. The prospects for this remain uncertain. We have lost a considerable measure of two firmly held beliefs in those golden years for the housing market that pushed home construction well past the underlying demographic demand for housing.

The first was that home prices would rise faster than inflation indefinitely so that our homes would make us rich and buying a more expensive home or a second home would make us even richer and did not put the ability to fund our family’s monthly budget at risk.

The second was that buying more house was the right thing to do. None of us really needed 400 sq. ft. bathrooms, two or more extra bedrooms, granite countertops and custom rooms for special activities like storing wine or watching videos. We could stay out of the rain and cold in Levittown. But investing in housing was right for current consumption. It was right for building a risk free retirement nest egg. And it was socially right. You could incorporate green features if you spent enough and thus show your environmental awareness. You were keeping the economy strong and providing jobs for new immigrants. People came to define themselves to the world by their home as they earlier did with their cars. Unfortunately, cars depreciate. By late 2005, people with only a vague understanding of what causes changes in residential asset values were taking on monthly home payments that older generations would have considered incredibly imprudent.

How quickly can we get over the shock of the last eight months? Home prices fell. Investment in homes became less liquid and hence more risky. Several million families exposed to huge losses when the housing downturn began abruptly are now considered fools by their peers instead of clever investors. There is no way to model this with time series data. I think it will be 2009 when investing in homes by the most risk-accepting amateur households again becomes both financially sound and socially acceptable enough to let your neighbors know that you are doing it. And it will take a few more years for the "follow the crowd" investors to join in and again generate an overheated housing market.