The U.S. Census Bureau has released a new report saying that home ownership has dropped to it’s lowest level since 1965. Given that the U.S. population is more than double what it was in 1965, this is a startling statistic.
Another report just released by analysts at Morgan Stanley, pointed out that Census data does not take pending foreclosures into account, and by their estimates, the home ownership rate is actually well below those 1965 levels if you account for those who are delinquent and in the process of losing their home to foreclosure.
Home prices are still eroding slowly, a victim of the simple fundamentals of supply and demand. There are still too many vacant homes on the market, and too many continuing foreclosures creating too much available inventory. Combine that with tight credit making it more difficult for borrowers to qualify, and you have a recipe for declining home prices.
But even with all that bad news, housing does possess one important characteristic that stocks and gold cannot match. That is the fact that housing is a fundamental human need. We all need shelter. This is why residential real estate, even as beaten and battered as it has been, is only down 30% or less in most U.S. markets, after 4 solid years of turmoil and record foreclosure rates.
Because of the fact that housing is a fundamental need, home prices can only go so low before someone will buy it. In fact, the lower housing prices go, the more likely it is that buying will pick up for the simple reason that it becomes more affordable. The demand is still there, but prices had gotten so high by 2006 that they were no longer affordable for buyers at the median income level.
If you’ve seen the documentary called “The Smartest Guys In The Room” about the collapse of Enron, you are well aware of how stock prices can be manipulated and how corporate income and expenses can be misrepresented in order to boost stock prices. Indeed the tech bust in the early 2000’s was a commentary on companies who were lying about their profits, and in so doing, manipulated their stock prices to higher levels. Once people began to realize that the accounting was phony, and the books were being “cooked”, Enron and many other companies quickly collapsed and their stock prices went to zero, leaving many investors with nothing.
Not so with housing. In spite of a complete lack of meaningful government assistance in the housing market, in spite of the Obama Administration’s attempts to convince people that maybe they need to rent instead of buy a home, in spite of record high foreclosure rates, and the worst economic recession of the post WWII era, housing is ONLY down 30% at most, in most markets.
As I write this, the breaking news is that stock markets around the world are plunging after the U.S. debt deal made it obvious that the U.S. Government has no idea what to do about actually making real cuts to get the budget deficit under control. The market is down 4% overnight. Everyone is worried about how far the markets may drop and how fast it could happen.
Housing is pretty stable when you consider how fast the game can change in stocks. On average, home prices have fallen about 30% in some of the worst hit areas. But as long as the housing is located in an area where working people want to live, a home will never lose all or most of it’s value. And home prices cannot be easily manipulated like stock prices can. If they could, the FED, the NAR and the NAHB would have forced them back up long ago. And if rental demand continues to increase, we’ll see drastic increases in rent rates, which will then stimulate more home sales, just as it did in the 1980’s when renting became more expensive than home ownership.
And frankly, we needed lower prices for housing, because the bubble had pushed prices far beyond the level that an average income can support. But this was not manipulation of housing prices as much as it was manipulation of the easy money that created artificial demand, which drove prices up to unsustainable levels. But unlike stocks, the housing bubble could not be hidden by phony accounting. The facts were there for anyone to see. The problem was that most people, including government and the media were not interested in looking.
I’m in housing for the long run. That’s not to say that you don’t need to make smart buying and investing decisions. Housing does have it’s ups and downs. But in the long run, shelter is a fundamental staple of human existence. And that will continue to maintain housing’s place as one of the most essential commodities on the planet.