A recent Wall Street Journal article reinforced some good points I have been trying to make about the viability of the housing market in the short and long term. The article which can be seen in its entirety here basically says that despite all of the negative news which surrounds the housing market, it is still a good idea to buy a home.
But the long-term benefits of homeownership remain very much intact. For now, at least, you can deduct the mortgage interest on your taxes—a big perk for people in higher tax brackets. You get to paint your walls any color you wish, without having to clear it with a landlord. And assuming you can buy a home for about the same price as you can rent one, buying will give you the ability one day to live rent-free. Come retirement time, a paid-off mortgage means your monthly expenses are significantly reduced, and you have a chunk of equity to play with.
So what might the next five years look like? Once the foreclosure mess begins to clear up, say housing economists, the traditional drivers of the housing market—demographics, affordability, loan availability, employment and psychology—should take over.
Demographics are going to play a key role in the recovery. According to the article, last year there were 950,000 new households formed and in the future that number will be more like 1.2 million per year. All of these new households need a place to live. Take that information and set it next to the fact that new building starts of residential units are at an all time low. You don’t have to be an economics PHD to figure out that when increasing demand and decreasing supply are mixed something has to give. What happens in real estate is that prices rise.
Another major premise of their article was that housing is becoming comparatively affordable. Prices dropping or remaining stagnant in a general inflationary environment make houses cheaper. On top of that mortgage rates are still amazingly cheap and won’t stay there forever. A quick side-note. I have clients looking to upgrade houses. The homes they are looking at are roughly $150,000 more expensive than the one they are selling. After running the numbers they figured out that their total payment was going to be about $160 more on a monthly basis. Peanuts!
Their last point was regarding the psychology of the consumer. Obviously, people have become very cautious and they are wondering if this is temporary or whether it is more of a permanent shift.
But it isn’t clear whether the fear will result in a prolonged change in attitudes, as during the Great Depression, or have little long-term impact, as was the case for the housing bust that shook California and the Northeast in the late 1980s and early 1990s. Eighty-seven percent of people surveyed by Fannie Mae said they preferred owning to renting, though access to schools, control over one’s environment and other quality-of-life issues now are seen as the key benefits of homeownership, with building wealth and other financial factors viewed as less important. In addition, 67% of renters surveyed by Zelman Associates said they planned to buy a home in the next five years.
I would recommend reading the entire article. I have only touched on the fringes.