A new set of real estate fundamentals

News analysis: Long-term value, not short-term appreciation

The real estate industry must rethink the market fundamentals, the long-held demographic and economic beliefs that experts argued would drive the housing demand into the future.

The world has turned upside down with old truisms now seeming trite.

In January 2003, Inman News convened a conference on the "Housing Bubble," during which some experts promised the boom would continue because of six "market fundamentals." These were the mantra for the industry for more than 10 years:

  • The demographics-as-destiny argument. The expanding U.S. population — immigration — would fuel real estate demand well into the next decade.
  • Low mortgage rates. Cheap credit would keep home loans affordable.
  • Boomer wealth. Prosperity and the rolling over of assets from the Depression generation to the spending generation would continue to ignite home purchases.
  • Consumer confidence. At the 2003 conference, Yale professor Robert Shiller of the Case-Shiller home-price index argued that historic bubbles did not burst until consumers gave up on the asset that prompted their confidence. At the time, real estate enthusiasm was as strong as the morning Starbucks coffee habit.
  • Low unemployment. The argument was that people who are employed buy houses.
  • Unlimited market liquidity. Access to capital seemed unrestrained as Fannie, Freddie and the mortgage-backed securities market was flush with funds.

Most industry experts proffered that the boom could continue unabated.

The housing market held up for two more years after the 2003 conference as an unaccounted factor — subprime mortgages — further whipped up an already questionable housing market and covered up cracks in the fundamentals, such as out-of-control home prices.

As the bubble began to burst in 2006 and 2007, real estate experts were bolstered by their "market fundamentals" arguments. But those promises now appear empty.

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The demographic wind is gone, as immigrants are less drawn to the United States because of our economic demise and our overbearing border constraints.

Mortgage rates are low, but artificially cheap home loans are gone and super tight credit makes it difficult for even the most worthy borrowers to take advantage of low rates. And the secondary market has been downsized beyond anyone’s imagination.

Boomer wealth is shrinking every day as home and stock equity evaporates. The tables have turned on the lucky generation. Plus, record levels of debt reduce the net worth of the average boomer’s personal balance sheet.

Consumer real estate confidence is waning as homeowners witness record losses in their home equity.

Demand for housing now depends on more basic considerations — a new, but actually an old, set of fundamentals.

Homeownership offers more control and freedom compared to renting. The government subsidizes homeowners, not tenants. And over the long term, owning a home is a disciplined way to build savings as owners pay off their loans and keep their housing costs predictable, assuming they get fixed-rate mortgages.

And finally, homeownership becomes reasonably affordable because wild swings in value even out as liquidity excess is not pushing too many buyers into the market.

In this environment advantages still favor owning over renting, but the new fundamentals translate into a housing market that is significantly smaller.

It is a future based on long-term value, not short-term appreciation, with significantly fewer home sales but a more stable market.

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