Real estate & the economy

Feel free to take the comments below with a grain of salt. I am not in the real estate business. I have never owned real estate. I have never studied real estate, and have had only one course in economics. I have, however, been aware of  real estate markets in both Texas and California over the past twenty years, so my evidential base is not entirely lacking.

People seem surprised that the real estate market has not only failed to improve but that prices continue to drop. While there seem to be many rich folks out there who are able to buy what ever house (or houses) they want, even more feel priced out of the housing market. In the first place, looking at markets like those in California, real estate prices have been too high for at least a couple of decades. When people believed housing would appreciate indefinitely they found ways to justify pouring a large percentage of their resources into homes. Now that they have discovered not only the end of appreciation but the aggressive onset of depreciation, they find it much harder to justify.

Second, the high prices in some markets are far beyond what people with ordinary, middle income salaries can afford. And that was before they lost their jobs or settled for lower paying jobs beneath their skill and experience level. Even those who still have the same jobs are feeling less security in those jobs. When they sense the precariousness of their income stream, how can they even consider buying an unaffordable house?

Third, lending institutions have reversed course from their policies that eased the housing boom. Instead of easy credit, credit has become hard to come by. Lenders insist on large down payments – large compared to the “nothing down” (or almost nothing down) of a few years ago. When jobs are uncertain and following an era in which many lived beyond their means, there just isn’t money in the bank for substantial down payments.

Is there a solution to all this? It depends on what one means by a “solution.” If one is asking for a return to the high-flying days of the real estate boom, when credit was easy, large debt could be rationalized on the basis of real estate price inflation, and houses could serve as sources of cash for other desires (electronics, cars, vacations, school, etc.), then I don’t think we can – or should – look for that solution.

If, however, we imagine a situation where people who work can afford adequate housing without fear of bankruptcy, where people can sell their homes when they move and find homes in new communities, than I would think that kind of solution is possible. Here are some practices that might help make that happen:

  • People will have to learn to live within the bounds of their income. Unending reliance on credit doesn’t work as a strategy for financial stability. Doubtless, adopting the practice will (and already has) brought the economy down, to the extent that the economy was based on fictional valuations, so this wisdom will not result in a quick fix.
  • We will do better if our economic model is more robust than “look out for #1.” It is not the case that all people – whether taken as individuals or as families – can afford adequate housing even if they are prudent with their income. Some are disable, some lack adequate income even for the basics. If my concern for housing is only for my own housing and not for the needs of others, our system will not be sustainable. I see an over concern for “property values” as one way of failing to love our neighbors. (I am not saying that we should be poor stewards of our property or that we should encourage poor stewardship in others.)
  • We will all gain if we see ourselves in the same boat as our neighbors. Even if we are rich and they are poor, even if we consider ourselves prudent and successful and others foolish failures, we will do well to remember that all of us inhabit a common housing system or ecosystem. What I do impacts others, just as what they do impacts me. While the zero-sum economics of ancient times (the notion that the size of the pie is fixed, meaning that if I have more others necessarily have less) has been discredited, an economics that says that each of us have our own infinitely expandable pies (that don’t significantly impinge on others) has also been discredited. We are in this together.
  • Prices will have to come down further. This is not primarily because people need housing, but because sellers (who need to sell) will not find buyers who will pay their asking prices.
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