America has built a large part of its economy on homeownership. Owning a home is part of the ever more elusive American Dream. Yet, over time, owning a home became a larger and larger burden as new buyers were required to take on bigger debt loads merely to buy a basic home. Incomes weren’t rising so debt was the new subsidy. The apex of the bubble was reached in 2005 although prices didn’t start falling in drastic fashion for a couple of years later. The US Treasury and Federal Reserve are largely to blame for inciting the biggest housing bubble the world has come to know. The lenders are equally to blame for creating the structure that allowed this to happen as they championed de-regulation and completely neglected any fiscal responsibility.
So what happened? Let’s take a look at some raw data: from 2001 to 2006 home building was off the charts. Single-family housing starts were up to a seasonally adjusted rate of 1.8 million a year even though population growth did not warrant this new inventory. From 1999 to 2001 the rate was hovering around 1.2 million. So 600,000 properties were being added each year above the normal trend and this lasted for 6 years. Of course, this number has collapsed at a pace not see since the Great Depression. So again—why did this occur? #1) Too much building. #2) Ignoring the demographic trends of the market itself.
Think of the dynamics of a healthy market. Those persons involved in the normal housing process, sell a home and in most cases will buy a “move up” home. This can be a new or existing home. Either way, they are clearing some of the vacant inventory off the market with typically two transactions taking place (buy and sell). With foreclosures, it is normally a one and done deal. Someone losses their home, and the person buying that home is merely taking over inventory that has already been accounted for. This is why the foreclosure figures are so important.
What does all this mean? There is an enormous amount of overhang in the market. Home sales have increase slightly over the last quarter. However, this increase cannot be credited to an economic recovery, but to a continued collapsed in the home prices themselves. Why are we assuming that if prices continue to go up, people will keep on buying? The driving force right now is affordability, not economic recovery. With that being said, we are merely treading water. We have years to work through this. There is no magic solution in this process.
Tags: American Dream, economic recovery, home affordability, home ownership, is it a good time to buy a home, mortgage lending, qualify to buy a home, should I buy a foreclosed home, should I buy a short-sale home
