I was reading an article last night and economist about how they were predicting that housing prices will pick up pick up the next few years due to rising population slow house construction, thus leading inevitably to a housing shortage and higher housing prices.
While there is some truth in this, and in the long run it may play a minor factor in this, the same argument was used during the bubble to justify the belief that we have entered a new paradigm of super high housing prices due to a lack of available land. That presumably available land has not prevented housing prices from collapsing.
The main reason why housing prices will not go up anytime soon is simply because, unless the economy suddenly really turns around, there simply is no money to support higher prices. Prices can only go as high as people are able to pay. In the bubble prices were allowed to get so high because people weren’t actually paying those prices. Instead, people just took out huge unaffordable loans to buy the houses, and the whole thing inevitably collapsed because it was unsustainable. We must remember that despite the fact that housing prices have come down quite a bit, they’re still very rich in relation to the long-term historical price of housing. And, the economy is worse than usual, so prices may even dip lower than the long-term historical average.
Traditionally, one of the major sources of house purchases were young people buying their first house. Today young people often don’t have that option, because more and more new graduates are entering the workforce with large and aggressive loans, and many of these people will not even be able to find jobs, or will find jobs that pay less than the expected. So for new people, salaries will often be reduced or nonexistent, while they struggle to pay off their large student debts — debt which often comes with nasty penalties and high interest rates. Just keeping their heads above water, and not being devoured by the interest and penalties on student loans, will keep lots of young people completely busy. There will be very little money left over to save up for a big mortgage.
So, young people will not be enthusiastic buyers of housing, and we are entering the age that the baby boomers will soon begin to retire, and downsize. Many of them will find that that they have less money than they had anticipated due to: declining housing values, and a decade of negative returns in the stock market, as well as savings rates below the rate of inflation. So, some of the downsizing will be more out of necessity than a lifestyle choice.
Finally, I would not be surprised if the federal government eventually decides to wind down Freddie, and/or decides to cut the various tax incentives and supports that the government provides to property owners. We should have done this a long time ago, but there are massive deeply entrenched financial interests that bribe to keep these supports alive. We may never get rid of housing supports due to massive industry lobbying (a.k.a. corruption), but in a period of out-of-control deficits it must appear quite obvious to any rational and informed person, but if you want to get a handle on government spending, this is one of the first places to start.
In sum, I just don’t see where all the money is going to come from to push housing prices ever higher. Of course, if inflation takes off housing prices will eventually rise, but not in real terms — just in inflationary terms. In other words, a house may increase by 50% in price, but the cost of everything else has increased by 100% due to inflation.
We still have several years of back logged forclosured houses to work through, which will weigh down prices for the foreseeable future. Eventually, with continued population increases, housing will become scarcer again, but when that happens I have no doubt that they will start building more houses once again to meet demand, except this time the houses will be more modest so that they can be sold at a price that people can afford that accords with the weak economy.
As much as people want to desperately believe that the housing market will come roaring back in the near future, and with it good times economically, the reality is that this is highly unlikely. The whole housing bubble was nothing more than a fake bubble economy. People felt rich, and they had money to spend, but it was all just debt money. The pain that we are going through now is the effect of the disruptions caused when debts cannot be repaid after we have gone out and spent all the easy money. Real economies are based on production. That is the foundation of a successful economy: producing valuable goods and services that increase the quality of life, and that other people are willing to buy. Any economy that can do that, is in the driver seat. They can either keep their high quality goods and services for themselves, or they can exchange them for other things of value provided by other economies. This is the main reason why China is doing so well, because it produces so much. The United States, however, consumes more than it produces, which means that it is in a very vulnerable position. The United States has been trying to maintain and even increase its standard of living, not through production, but through debt. We buy things from foreign countries and promise to pay them back sometime in the future. In the long run this is unsustainable.
During the housing bubble, it was commonly believed that economic nirvana could be achieved simply by buying and selling static asset (the house). But a house, that just sits there being bought and sold, is not producing anything new for the economy. And, since real economies are based on production, not on speculating with static assets, the whole housing bubble did not represent real economic growth. The housing bubble is again a family going out and taking a large loan from the bank, and then living very well for a few years until the money runs out. During that period they can fool themselves that their personal “economies” are doing so well and are so successful. But in the end, the money is spent and all that is left is debt. The only exception to this rule is if the family took the borrowed money, and very wisely invested it to create or expand a family business, which in the end produces so much profit that the family can easily pay back the loan with a surplus. Of course, we didn’t take all that mortgage money and build productive competitive factories. Instead, we took the money and bought consumer goods, many of which are made abroad. At the end of the day, the money is spent and there’s little to show for it except crushing debt.