Despite continued discouraging data from the real estate sector, a few bullish arguments are beginning to emerge. One MIT economist even believes that demand for new homes exceeds residential construction.
At a time of slumping home sales and a glut of unsold inventory, it's hard to imagine how anyone could form a bullish take on the troubled U.S. housing market. Even though home prices have risen slightly in recent months, experts in charge of Standard & Poor's Case-Shiller index, a crucial indicator of the health of the housing market, warned as recently as last month that the market remains weak. And some analysts think home prices could fall further by 15% to 20%.
But talk about real estate has shifted somewhat lately. It looks as if the contrarian view of the housing market is beginning to gain traction, if ever so slightly.
Credit Suisse says the worst is behind us and that fear of another hit on the housing market is just overreaction. The bank offers a few factors that could help home prices from here on out, including government support of about 70% of home mortgages that will likely keep prices from revisiting the nerve-wracking plunges seen in 2007 and 2008. Also, The Wall Street Journal's Brett Arends earlier this week listed 10 reasons to buy a home, countering a recent Time Magazine cover story earlier this month that questioned the pros of homeownership. Arends lists everything from record low mortgage rates to savings on taxes to guarding against inflation.
All are worth noting, but one of the more striking bullish arguments come from an economist at Massachusetts Institute of Technology's Center for Real Estate. Bill Wheaton, who thinks the housing market is poised to make a strong comeback, calls home construction "a sleeping giant that is about to wake up."
Wheaton thinks much of the excess home inventory would either be sold, occupied or other otherwise absorbed by 2013. But from 2011 onward, demand should return to pre-recession levels. What's more, he says, the recovery of home construction could boost overall GDP at levels unseen during recoveries after previous recessions, with the exception of the massive building that happened right after World War II.
Not just a comeback, but a strong one
"Housing construction will not only rise, but it will stay high for a while, which didn't happen in previous recoveries," Wheaton says, commenting on a paper he wrote for the center in 2009. "It won't just be a one or two year blip."
So is Wheaton really onto something, especially at a time when so many people are jobless and housing units sit empty -- an unknown number of which could eventually fall to foreclosure?
The crux of Wheaton's argument lies in the rate of residential construction today. It's been historically low – so low that he believes demand is actually exceeding the level of building going on. This helps set the grooves for a relatively large comeback in residential investment.
Here's how Wheaton backs the imbalance of demand for housing units and residential construction.
He estimates that housing demand in 2009 was at about 1.1 million units – more than twice construction at the time. At this rate, the excess inventory will eventually be absorbed. "It's going to be a long time before construction picks up with demand," Wheaton says, adding that this should help housing prices. Foreclosures won't stop anytime soon, he says, but demand will return to a more normal level, clearing out the inventory and eventually sparking more new construction.
Housing construction could hugely drive America's economic growth over the next few years, Wheaton says. Residential investment as a share of GDP is relatively small, averaging about 3% to 4%. But given that there's so little building going on today, it's plausible housing construction could add an average of 0.7% to GDP growth per year over five years – a level far greater than what has been seen during recoveries of previous downturns.
Some might think Wheaton sounds way too bullish given what most experts are saying about America's housing rut. He could be wrong. He might only be half-right. But the bull's side is worth hearing as much as the bear's.
See also:
Housing Quagmire: Is it time to remove relief?
Rise of the renting class
Home prices gain 3.6% in the past year
I am a broker in central NYS and this year I have seen a definite increase in activity- problems often arise at the lenders end, changing the rules the last 10 minutes, etc. However, being a rural land broker, we deal with a great deal of smart buyers with cash who know the time has never been better to buy and they are doing just that- I tend to agree with this article for at least my area. A trend I hope continues as 07,08 & 09 were years I have come close to losing everything I have. We are trying to stay alive and if this little surge continues and grows I just might survive!!
He is right. I can see a smart person who invest where the money going to be safe. In fact sales activities are picking up in good locations. I mean smart people are taking advantage of this low mortgage and best deals. Those who doesn't have courage are going to be regretted in the future.Despite negative media talk if the housing activities are taking place in good neighborhood,means smart people are buying. Times magazines article remind me an irresponsible persons thinking. I mean no saving in life and keep renting means helping landlords more and more richer. The same theory poor live in poor rich get richer.
You commenters are missing the point. This article is brilliant satire.
Article is just fiction of mind. it does not correlate with following things 1. mortgage debt to gdp ratio 2. unemployment 3. Flock of immigrant in weak economy 4. inflated price due to vacation home or second home investment 5. heavy taxation structure compared to earning(property tax, condo fee and other taxes) and increased forcast of 2011 taxes 6. slow gdp growth amid very high debt 7. Increased inventory of houses after expiration of first time home buyer credit 8. home prices is way below its construction cost.
Wow, I wish I had the drug this writer has ! Shoot,I would think all is so rosey and peachy. Housing market will be booming, jobs market to purchase those homes will boom ! Economy on the uptake ! WOW, that's a GREAT DRUG, can I have more please, my writing skills are on a roll ! LMAO you FOOL !
There are obstacles like qualification for loans and jobs/people wanting to buy a new home (goes back to qualifying for a loan). Homebuilders may finance purchase, but buyers are needed. I'm surprised anyone is building a new home now, considering how many newer foreclosures are out there. A good reason to buy a new home is some cost less than what is owed on a foreclosure, but banks are willing to negotiate. I've seen such number crunching about autos too ("XXX have been produced and is far below the standard replacement rate"), but times are different - people are driving cars longer, and there is still a huge inventory of newer foreclosures. College graduates can be new buyers, but many can't find jobs.
AJ has a very good argument. However, if a buyer has a 25% down payment on a condo, they can avoid the 50% owner occupied rule.
Here's how prices are kept artificially high: 1. Gimmicky tax credits 2. Super low interest rates 3. Many foreclosed properties are being kept off the market
There's much tinkering going on to keep prices artificially high,and when the tinkering stops we're all left holding the bag
can you share what you are smoking, bro?
This guy is right and it's already happening in Los Angeles county. Especially with houses that have been properly renovated and upgraded - they sell within a week of going on the market and typically have multiple offers. There's a lot of people waiting on the sidelines ready to pounce but they're only going to do it if the property is quality and priced correctly. Two houses on my street just went for over asking price in the last three months. That's a big deal and an major indicator of things to come. I don't think an unrealistic surge in housing sales will happen overnight, but I am already seeing prices increase in Los Angeles - typically a city a step ahead of the rest of the county when it comes to housing trends.
Ridiculous and an irresponsible article in light of reality. I'll not visit this site for a while in protest. Give me realistic news please. Too much to ask for? Profits at stake, eh?
Even if construction picks up, sales jump (which they haven't), and mortgage rates continue to stay low... closing costs have skyrocketed! Up 37% this year alone, with no sign of dropping! And that's often enough to discourage buyers. Read more here:
http://www.aspensquare.com/blog/archive/2010/09/17/the-conundrum-of-climbing-closing-costs.aspx
That article was absurd. Of course the housing will make a huge rebound. It will take 4,7 or maybe even 10 years.
One issue has not been addressed is the strangle hold banks have on the sale of condos. Financing is ONLY available to purchasers if the condo complexes are more than 50% OWNER occupied.
Since developers have been forced to rent their unsold vacant units to maintain a cash flow, few complexes are more than 50% owner occupied. This has resulted in artifically low prices for condos because only those investers with cash can purchase them. In Phoenix, for example, condos are selling for only 25 to 30% of what they sold for only a few years ago.
Regulations need to be changed immediately! If a complex is more than 50% occupied (whether by renters or owners), credit needs to be available to qualified prospective buyers.
This one simple move would result in a seller's market with huge implications for the housing market. Many folks who've had to give up their houses would qualify for condo financing. Many people who want a condo, but don't have cash, would qualify for condo financing. Prices for condos would start to recover and the domino effect would help prices of houses to creep back up to reasonable levels.
This simple move on the part of legislators would benefit sellers, buyers, the housing market, and the economy as a whole.
In the Carolina city where I have lived all of my life I saw more and more houses being built before the "crash". Rows and rows of houses being built as far as I could tell before buyers were contracted. I supposed that it was because of this generations desire to own a new instead of a used house. I thought it was just my limited vision that made me feel like "How can they keep selling all of these houses?" to me it felt like housing sells resembled miles and miles of buffalo that would never end. When this happened I was surprised only that the industry was surprised. I learned working in manufacturing that if you create product without orders to back up the inventory you will eventually get into trouble. I can see where it will eventually "deglut" itself and all will be normal again.
Wheaton may be optimistic, but it's way too easy to dismiss the optimists when we're in an environment like this. On an inflation adjusted basis, prices overall have pretty much returned to thier pre-bubble levels. Yes, there is still alot of inventory to work off, but there's got to be a lot of pent up demand building too, which underlies much of his thesis. His point is, when it blows, it could really blow, and whether it's next year or the year after that, it's going to happen. I agree that prices won't jump any time soon, but that's ok with me. I'll take slow and steady any day over what we just went through. Lending is tougher than it was, but that's good...loose lending is what got us into this mess in the first place. If you've got good credit, you can get a loan, even if it is more of a hassle. Rates wouldn't be this low if there wasn't money to lend. I think you've got to take the long view with real estate...everyone has to live somewhere. Over time, demand will grow. Everyone is so caught up in what's wrong right now that they can't see the opportunities down the road. Fear is the biggest enemy right now.
He could be on to something. I live in Southern california and a report just came out here that in LA county home prices have risen 9% in San diego almost 10% and in SF 14%. Home builders have come back and are not completing neighborhoods and the prices at which they are selling are equivalent to 2007. The houses do not have as many of the amentities as before the crash and are actually several undered square feet smaller. None the less, his argument could hold water. 12 months ago, I was under water by 60k, now houses are selling what I paid for my home. From what I am seeing in California, starting to look a whole lot better.
I am a mortgage loan officer. Yes, rates are at historical lows, but it has NEVER been more difficult to qualify for a loan. Investors are adding more and more conditions to loans already in processing and increasing the number of qualifying guidelines upfront on a daily basis. Yes the government has pledged to continue buying mortgage backed securities to keep rates low, but what difference does it make if banks won't lend and if people don't qualify. In addition, how are things going to get substantially better until unemployment is decreased and more people go back to work?
It's nice to finally hear some intelligent optimism. It's kind of simple, people aren't buying right now but when they do, it's going to be huge. There might be a 2 million surplus of homes, but that is a terrible indicator of anything because even before the housing market collapsed there was always a yearly surplus. That figure means nothing. Considering the unemployment rate for unskilled labor is what keeps the numbers so high, once people start buying houses the unskilled laborers will have jobs and guess what...the economy rebounds. Of course it's not that simple, but it is a big part of the equation and will help usher us out of this economy problem we have.
THis is a joke right?
I'm sure we will hear lots of encouraging news up until the election.
Wheaton clearly over estimates the demand cycle compared with the supply out there and part of the reason we got here to begin with was an over-supply of homes and credit. Baby boomers are downsizing, we've lost more than 20million jobs, and we've got disastrous currency problems that will make any one side of a recovery trigger a bigger problem. If we raise interest rates, as they should be raised, to around 6-7%, that will choke off mortgage affordability...and so on. We've got massive inflation already (these crazy deflationists need to explain to me where there is one single aspect of our daily lives that is less expensive than 5 years ago) and that's not a recipe for housing growth. If anything, it forces people in to renting until prices get low enough to justify the expense and the loan. We're not anywhere near that point and it will take another significant down shot in prices to stimulate purchases....and even then, we're going to bounce around at the bottom as the economy tries to clear the toxic paper debt in our system. It amazes me that people have such a poor grasp on how bad things might get.
I think the housing market is taking a hit due partly to new regulation that have been instituted by the federal government or banks. Not sure which of the two is the principal driver behind the new practices. All I know is that there are a lot of folks who have steady jobs, but simply can't refinance a home or investment property simply because of new guidelines. Ability to repay doesn't even seem to factor into the equation. I was one of these unfortunate souls. I have had my condo rented out for 2 years due to my living abroad. My condo is on a 15 year bi-weekly note and is costing me an extra $1000+ per month to keep leased out. I'm bound by law to keep the place rented until the current lease expires. Refinancing this property is not an option due to new restrictions on equity requirements of 20% for investment properties. The ironic thing is, I had to 'rent' an apartment for more money than a mortgage and I have excellent credit. A refinance to a 30 year note would turn the condo into a positive cash flow scenario and reduce my current debt to income ratio by 25% or more. Just can't find any bank that will do the refinance. I understand the intention of the rules that are put into place, but there must be some sort of common sense that can be applied to the process.
James from Tulsa, on the money. Crack is whack.
Seriously when do ads by realtors pass as news stories???
"Banks take over record number of homes in August" - Supply just keeps increasing, only slowing a little for artificial demand. Homes will return to 2003 levels, leaving anyone who bought a home during the run-up underwater. 2013? Seems a little optimistic to me unless they stop trying to keep the bubble inflated. TARP-2!
You won't see any increase in demand. We have thousands of abandoned homes for sale now, and people in massive debt, there will be no housing recovery for at least 10 years, if not longer.
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