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Housing Trends

December 2018

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The Future for Home Prices

WSJ: Many Americans still see real estate as their best shot at wealth. In survey after survey, people expect prices to bounce back -- in some cases, as soon as six months from now. Those hoping for a quick rebound are likely to be disappointed. Economists and other pros generally say home prices won't bottom out before the second half of 2009, and some don't see a bottom until 2011 or 2012. Even when they stop falling, prices may scrape along the bottom of the rut for years.

My response: Market timing is always difficult and all real estate is local. The latest government data on prices shows 43 states with home price declines of 5% or less, and 18 states with a positive price gain. Only four states - Arizona, California, Florida, and Nevada - showed home price collapses in the double digits. This government data has narrow coverage on homes with subprime loans, so the data should be viewed as price trends in neighborhoods with little subprime loan exposure. Currently less than 10 percent of homes have subprime loans. Interestingly, these very four states are the ones showing recent notable sales increases as buyers take advantage of the knocked-down prices. Anecdotal reports of multiple bids suggest prices may be bottoming in these areas.

WSJ: Experts say you should generally expect house prices to rise just a bit more than inflation and roughly in line with household income.

My response: If home prices rise on average at an inflation-adjusted rate of 2.5% to 3% a year, then nominal home prices can expect to grow about 4.5% to 6% a year. If a person buys a $200,000 home today, then that home will be worth $310,000 in 10 years, $505,000 in 20 years, and $823,000 in 30 years, assuming a 5% home price growth. Given that most homeowners have 30-year mortgages, all the debt will have been paid off at the 30 year mark, at which point the $823,000 is pure equity. If assuming a 6% price growth — to illustrate the power of compounding even from a small change in growth rate — the home price will be $1.08 million in 30 years. Given America's poor savings rate, any form of savings discipline such as a monthly mortgage payment helps Americans accumulate wealth.

WSJ: In a poll of 2,000 adults, real-estate-data provider Zillow.com found that 61% believed the value of their home would either remain level or rise over the next six months. Another survey of more than 1,000 homeowners, sponsored by real-estate-services firm Realogy Corp., found that 91% thought that owning a home was the best long-term investment they could make. And an online survey of 5,000 people commissioned by Citigroup found that just 32% believed it was a good time to invest in stocks — but 51% said it was a good time to buy a home.

My response: Who can argue with consumers? Even if they get it wrong at times, the freedom and the power of decision-making brings greater happiness than if decided by someone else.

WSJ: In the long term, house prices are driven by fundamentals that are hard to predict: immigration, birth rates, the size and nature of households, and incomes. The trick is to figure out where job and income growth will be strongest and where immigrants and others will want to live.

My response: Correct. All real estate is local. Not only that, all neighborhoods are highly local. I remember a story in my local paper several years ago about two homes that looked exactly alike (with photos provided in the story as proof). Both homes fetched roughly the same price at one point. At the time of the news story, however, one home was worth more than double the other — not because of any physical differences in the homes, but because of neighborhood qualities.

WSJ: Few people who invest in housing have time to follow these academic debates. For nearly four decades, Rich Sommer and his wife, Carolyn, have been investing in rental properties in and near Stevens Point, Wis. Mr. Sommer describes real estate as a good way "to get rich slowly." He and his wife, both former schoolteachers, gradually have built their net worth from zero to around $2.5 million through their rental properties. They have dealt with countless plumbing emergencies, evicted deadbeats and even once had to clean up after a suicide in one of their properties.

My response: Property management can be ugly at times, but some people are willing to face up to it for the financial rewards - and ignore silly academic debates. Academicians by their nature like to debate ideas and issues of consequences. Quoting John Maynard Keynes:

"The ideas of economists both when they are right and when

they are wrong are more powerful than commonly understood.

Indeed the world is ruled by little else."

But it is also said that academics often get involved in intense arguments over the tiniest matters. Quoting Henry Kissinger : "University politics are vicious precisely because the stakes are so small." Perhaps it is a good thing that most people do not follow academics.

Final thoughts: Buying a home is a serious decision with serious responsibilities. It should be done with care and be based on good information. Consumers should always be wary of any "how to profit from it" slogans but at the same time should not be discouraged by doom-sayers. Homeowners who bought during the buying frenzy and at the peak a few years back have lost a lot. That does not mean that the new crop of buyers will face the same fate. It has been shown that homeowners do accumulate wealth over the long-term. It is uncertain if that is because of the home purchase or from the financial discipline exerted on homeowners. Regardless, if you are one of those consumers who are financially and emotionally ready, current conditions certainly favor buyers over sellers. The time will surely come when sellers again have the edge. Anyone trying to market-time a purchase will inevitably feel the pangs of remorse of buying too early or buying too late. Anyone buying without trying to time a purchase will most likely feel happy about their long-term investment. You, therefore, have a choice between remorse or happiness. If choosing the latter, however, please do not overstretch your budget.

Source: Lawrence Yun, Chief Economist, National Association of REALTORS