PrintThere are some harsh realities at work that promise to inhibit housing demand into the foreseeable future, assuring only a modest recovery in the nation’s housing sector, at best.
Let’s begin with the fact that according to a recent Deutche Bank study, 26 percent of home mortgages are underwater-that is, the market value of the home is less than what is owed on the mortgage loan. The Deutche Bank also projected that in two years, 48 percent of all mortgages will be underwater. The implications for this projection are enormous. Almost half of all homeowners would have little financial motivation to leave their home. In other words, there is a meaningful number of homeowners, who under normal market conditions would eventually trade up or trade down to acquire another home, are likely to stay put during the next several years.
Underwater mortgages promise to seriously constrain housing demand into the foreseeable future. In contrast to past housing recoveries, today’s recovery possesses a smaller population of homeowners who will be eligible to trade up or trade down or purchase vacation properties when the recovery is well underway.
Another inhibitor of housing demand is the economy. Although today’s recession is showing hopeful signs of ending, the ensuing economic recovery is likely to be a modest one, restraining demand to purchase homes. A deeply damaged financial sector, a historically high budget deficit and a weak labor market promise to keep a lid on economic growth during the next several years.
An injured and tight mortgage credit market also promises to hinder future housing demand. Today’s menu of mortgage products is dwarfed by the menu of lending products offered during the housing boom years. Less available mortgage offerings combined with tighter lending restrictions are expected to prevent a meaningful number of households from participating in home buying.
Not surprisingly, lost household wealth during the past several years, via declining stock market values and/or home values, are expected to prevent many affected households from purchasing residential property during the next several years. This is particularly true for households that have experienced a meaningful loss in their 401-k retirement accounts. These households are no longer as confident about retirement and have a bias towards saving rather than committing to large asset purchases.
Finally, a dismal outlook for home price appreciation during the next several years is likely to further restrain the demand for home buying. This is because the ongoing foreclosure problem is expected to keep home inventories from dropping to more normal levels into the foreseeable future. Weak home price appreciation provides incentives for some households to rent rather than own. As a consequence, it is likely that the homeownership rate will continue to drop modestly during the next several years. Furthermore, modest home price appreciation is expected to limit the number of investment purchases over this time period.
Looking forward, today’s market developments suggest that the housing recovery over the next several years will be a modest one. This should be expected given that the housing sector just experienced the worst contraction since the Great Depression. There are just too many market obstacles to overcome-a weak economy, home price depreciation, lost household wealth, a damaged mortgage credit market, a nagging foreclosure problem and a significant number of underwater mortgages. If there is a positive in all of this, it is that housing recovery is on the road to recovery and is expected to improve over the next several years-even if it is at a snail’s pace.
Leave a Reply