Monday, July 21, 2008

Much Time is Needed Before Housing Can Recover

According to a recent survey, the top two obstacles to owning a home are (1) High Home Prices and (2) High Down Payments.

High Home Prices

Despite Home Prices continuing to fall, home prices are still too high.

Here's the Standard and Poors (S&P) Case-Shiller 10 City Composite Index since 1987:

Notice the dark blue line and the parabolic pattern reminiscent of the 2000-2002 Bubble.

The magenta line is the one year moving average of the Composite 10 index. If the Composite 10 index is above the One Year Moving Average, Housing Prices are in a Bull Market. If the Composite 10 Index is below the One Year Moving Average, Housing Prices are in a Bear Market. This is currently the case.

Still Unaffordable

According to a study looking at California Home Prices, many counties have incomes that are 50% of the income needed to afford the median priced home.

Previously, before the recent Credit Crunch, people were able to "afford" the homes based on loose underwriting standards, exotic mortgages, low promotional interest rates, and other adjustments. We are now experiencing the downside to this trend.

High Down Payments an Obstacle

Because of the recent Credit Crunch, Lenders have tightened lending standards. According to some, many people are trying to get financing, but they can't. Higher down payments are needed to buy homes now.

But how can these people afford the down payments when gas prices remain high, food prices remain high, the stock market is in a downtrend.

When combined with home prices remaining high and unaffordable, it will take some time before the housing market recovers.

Housing Annual Returns

According to Robert Shiller, author of Irrational Exuberance, and the Shiller in the Case-Shiller Index, from 1890 to 2007, the return on residential real estate was just about zero after inflation. Since 1987, it's been about 6 percent.

Robert Shiller also makes the case that if residential real estate returned 10 percent per year, houses would remain incredibly unaffordable.

In the Original Case-Shiller Composite 10 Index Chart above, there are two lines assuming 3% or 4% annual growth since 1987.

Future Housing Boom?

Is there hope for the future? Is there a future housing boom?

The stock market and the economy will eventually recover. Foreign investors, taking advantage of the cheap dollar, could start investing in U.S. properties.

Demographics will fuel the Next Housing Boom

But the real boom may be pushed by demographics.

Three major demographic groups include:
  1. Baby Boomers (est: 1946-1964; 44 to 62 years old): 70 million
  2. Generation X (est: 1965-1979: 29 to 43 years old): 17 million
  3. Generation Y (est: 1979-1994: 14 to 29 years old): 60 million

As you can see, Generation Y comes close to the large Baby Boomer Demographic.

One of the major booms since 1890 (according to Yale Economist Robert Shiller), occurred after World War II as the demand for homes increased. This boom coincided with the boom of the Baby Boomer Generation.

Now, Generation Y, 2nd in size to the Baby Boomer Demographic, is going to be the right age to start families and buy homes. This might be an event similar to the era right after World War II when the Baby Boomers were growing up.

If we estimate that Generation Y would start buying homes between 26-29 years of age, then that would mean that greater number of Generation Y would be of age within around eight years from now.

After a lengthy period of time for the economy to recover, and for housing prices to stabilize or decline to a more stable and affordable level, there could be a future housing boom as Generation Y starts to buy homes.

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