U.S. Home Prices May Be Lost for a Generation

[w¡n9Nµ7 §£@¥€r 123]

Commentary by John F. Wasik

May 4 (Bloomberg) -- We might be looking at a lost generation for U.S. home values.

Far too many analysts are calling a bottom to the housing market after home prices in 20 metropolitan areas declined at a slower pace in February, according to the Standard & Poor’s/Case-Shiller Index.

Don’t be blinded by the glint of optimism in headlines about rising consumer confidence and slowing price declines. Demographic and market realities tell a more sobering story.

You won’t see a widespread housing rebound in an economy in which 600,000 jobs a month are lost and foreclosures ravage the most overleveraged areas. These are just the visible barriers to a recovery.

Mortgage lending has also been an unusually tightfisted process of late. Lenders are demanding a 20 percent deposit for home purchases, and want impeccable credit ratings. About 45 percent of U.S. banks surveyed by the Federal Reserve said they had “tightened their lending standards on prime mortgages.” I suspect that number is much higher.

Then there’s the reality that the market is glutted with homes. A record 19 million homes stood empty at the end of 2008.

What you can’t see in the most recent housing numbers is the least-visible driver of home prices today: demographics.

The baby-boomer generation, the largest in American history, will be buying fewer single-family homes.

The U.S. is experiencing a 40-year generational peak in consumer spending, one that will lead to “the first and last Depression of our lifetimes,” author Harry Dent predicts in his book “The Great Depression Ahead” (Free Press, 2008).

Although we may not be headed for a 1930s-style Depression, there’s plenty of evidence to suggest that boomers are dumping their four- and five-bedroom suburban homes for two- and three- bedroom condominiums.

It’s also unlikely that the “Generation X,” born between 1965 and 1976 (or more derisively called “baby busters”), will bid up home prices. They are only 44 million strong, not as wealthy and even more in debt from college loans.

The baby boomers are reorganizing their finances after a rocky decade in stocks. They aren’t buying as many second homes and vacation properties in warmer climates.

That’s why it’s unlikely that there will be any swift recoveries in Phoenix, Las Vegas or San Francisco, where prices fell 35 percent, 32 percent and 31 percent respectively in February from a year earlier, according to the Case-Shiller Index. More setbacks are coming in central and Southern California and south Florida.

One thing hasn’t changed in this recession: Those who are mobile will continue to move where jobs are relatively plentiful and housing is cheaper.

The winners continue to be southeastern states and Texas. Some 67,000 single- and multifamily building permits were issued in the southern region in the first three months of this year, according to the U.S. Census Bureau.

Texas alone accounted for more than 20,000 authorizations. Hot spots are still Houston, Dallas-Fort Worth and Austin.

Considering that almost 120,000 permits in the entire country were issued during that period, it shows that more than half of all new construction is in the South, where the cost of housing and living is significantly lower than in the Northeast, Midwest and on the West Coast. In contrast, just 5,571 units were approved in New York and New Jersey combined.

While building permits don’t mean that housing will be built, they are one indicator of housing-market growth.

Yet don’t confuse building with the ability to restore home equity. Simply moving to another area won’t rebuild the estimated $6 trillion that was lost during the bust.

One of the reasons the housing mania was so damaging was that median home prices rose to about three times average household incomes as opposed to double income levels in 1950.

Wages simply weren’t keeping pace with housing inflation, so homeowners overleveraged to make up the difference. The wave of deleveraging will depress home prices in most markets.

It’s time to assess your options. Your home may not be a nest egg. You may never recoup your losses from the dot-com and credit busts in the stock market.

For most homeowners, wealth building and retention may depend more on a diversified, inflation-indexed bond portfolio than on real estate. This new reality, though, may be lost on those still trying to price their homes at 2006 levels.

(John F. Wasik, co-author of “The Cul-de-Sac Syndrome,” is a Bloomberg News columnist. The opinions expressed are his own.)

http://www.bloomberg.com/apps/news?pid=206...&refer=home

[I AM NOT THAT GUY 5,715]

Mortgage lending has also been an unusually tightfisted process of late. Lenders are demanding a 20 percent deposit for home purchases, and want impeccable credit ratings. About 45 percent of U.S. banks surveyed by the Federal Reserve said they had “tightened their lending standards on prime mortgages.” I suspect that number is much higher.

We could have avoided this whole mess, if lenders were not encouraged by the last two administrations to loosen lending standards. Get rid of teaser rates and variable interest mortgages, and we just might make the system solvent again.

Edited May 4, 2009 by Mister_Bill

[w¡n9Nµ7 §£@¥€r 123]

Mortgage lending has also been an unusually tightfisted process of late. Lenders are demanding a 20 percent deposit for home purchases, and want impeccable credit ratings. About 45 percent of U.S. banks surveyed by the Federal Reserve said they had “tightened their lending standards on prime mortgages.” I suspect that number is much higher.

We could have avoided this whole mess, if lenders were not encouraged by the last two administrations to loosen lending standards. Get rid of teaser rates and variable interest mortgages, and we just might make the system solvent again.

Measures like the moratorium on foreclosures and mortgage modification only postpone the inevitable; as long as government tries to 'ease the pain' by pushing the pain out to a future date, we won't see recovery.

[peejay 327]

Not everyone got burned in the housing speculation fiasco.

I bought my house before the gamblers and speculators manipulated the price of housing in general. The prices haven't dropped that much from where they eventually peaked in my neighborhood. I'm well above water.

[Ban Hammer 14,275]

if you bought before 2006, are you in good shape?

[I AM NOT THAT GUY 5,715]

if you bought before 2006, are you in good shape?

If you bought before 1990, you are in great shape. My loan matures in 2013. Hopefully, I will have it paid off next year.

[Ban Hammer 14,275]

if you bought before 2006, are you in good shape?

If you bought before 1990, you are in great shape. My loan matures in 2013. Hopefully, I will have it paid off next year.

2003 here.

[w¡n9Nµ7 §£@¥€r 123]

if you bought before 2006, are you in good shape?

Depends on location. Prices where I am are just above 2003 levels. It's worse in many places (Phoenix, parts of FL, etc.) and better in many others.

Check out this spreadsheet from S&P if you're curious.

http://www2.standardandpoors.com/spf/pdf/i...tory_042841.xls

[Ban Hammer 14,275]

if you bought before 2006, are you in good shape?

Depends on location. Prices where I am are just above 2003 levels. It's worse in many places (Phoenix, parts of FL, etc.) and better in many others.

Check out this spreadsheet from S&P if you're curious.

http://www2.standardandpoors.com/spf/pdf/i...tory_042841.xls

according to the composite, it's dead even with when i bought.

[w¡n9Nµ7 §£@¥€r 123]

if you bought before 2006, are you in good shape?

Depends on location. Prices where I am are just above 2003 levels. It's worse in many places (Phoenix, parts of FL, etc.) and better in many others.

Check out this spreadsheet from S&P if you're curious.

http://www2.standardandpoors.com/spf/pdf/i...tory_042841.xls

according to the composite, it's dead even with when i bought.

But do you think the composite is a particularly meaningful measure?

[fozzie 41]

Great time for 1st time buyers, Its been a daunting prospect for years to get 'on the ladder'. At least now it looks possible. We hope to buy in the next two years, but hopefully in the next 12 months.

[w¡n9Nµ7 §£@¥€r 123]

Great time for 1st time buyers, Its been a daunting prospect for years to get 'on the ladder'. At least now it looks possible. We hope to buy in the next two years, but hopefully in the next 12 months.

We'd like to upgrade in the next 12-24 months but I'm going to have a hard time getting the spousal unit on board. I can sell this place easy at a slight loss over what I bought it at (in mid 2003) and still get into a nicer property since those have dropped even more (proportionally). But convincing my wife that taking a 5-10k loss on this home is not the end of the world will be very very tough.

[spookyturtle 9,466]

Good.

[Ban Hammer 14,275]

if you bought before 2006, are you in good shape?

Depends on location. Prices where I am are just above 2003 levels. It's worse in many places (Phoenix, parts of FL, etc.) and better in many others.

Check out this spreadsheet from S&P if you're curious.

http://www2.standardandpoors.com/spf/pdf/i...tory_042841.xls

according to the composite, it's dead even with when i bought.

But do you think the composite is a particularly meaningful measure?

it's the only measure i can use, as kc isn't on that list.

[GaryC 7]

I wonder what things will look like in 10-15 years in areas where there wasn't a large drop in prices. Homes here haven't lost much value. I guess it was a good thing that we didn't participate in the housing bubble.