The Benefits of the Housing Slump?
By Steve Gillman
The current real estate situation (this is updated as of February
2012) is still not that great for real estate; and the last thing
most people think about are the benefits of the housing slump.
There are big problems for individuals, ranging from difficulty
getting loans to being "upside down" on ones mortgage
(owing more than the home can be sold for). On the other hand,
there is a bright side to the dropping prices as well.
Don't we normally love the idea of lower prices on anything?
We would love to see a 25% decline in the price of cars or groceries.
Housing is different because we use it but don't "consume"
it like other things. In addition to providing shelter, it's
an investment that we may someday sell. If you spent your whole
life in a house the value could fall by half without hurting
you at all. You might even get to pay less for property taxes
and insurance. This suggests two of the benefits of the housing
slump:
1. Lower expenses.
2. Lower prices.
If you haven't bought a home yet, this is an opportunity,
right? They just went on sale for as much as a 40% discount from
where they were priced just two years ago. Time to start shopping.
Also, with lower prices you get lower payments, lower insurance,
and lower property taxes. The latter two are benefits to existing
home owners as well.
Are there any other benefits to the housing slump if you already
own a home? There may be if you've ever thought about moving
up into a more expensive home. It may seem terrible that your
own home is worth $30,000 less than it was three years ago, but
what about the bigger home you dream of? That one could be selling
for $50,000 less that a few years back, and that's an opportunity,
isn't it?
Those are some of the possible personal benefits. Then there
is the long-term benefit for society that comes from the whole
housing mess. First, prices are getting back in line with what
is actually affordable, so many people with ordinary jobs may
once again be able to buy a home. This new buying interest means
that prices may stabilize before long.
Prices just went up too far and too fast. Some (perhaps most)
who bought those half-million-dollar starter homes in California
never could actually afford it. Buyers were speculating, hoping
to hang on long enough to sell for a profit a few years later.
Our crazy housing market made gamblers out of home buyers, and
the last ones to join the game lost the most. This suggest one
more benefit of this housing slump: important lessons we needed
to learn.
What did we learn? Zero-down loans really don't make sense.
Neither do interest-only loans. And negatively amortizing loans
were just insanely risky for homeowners and lenders. Reaction
to these and other mistakes in finance may go too far, but the
lessons of this era will be remembered - at least for a while.
That hopefully means there won't be a repeat of the run-up in
prices based on outrageously easy loans. It might mean there
won't be another huge housing slump in our lifetime, nor another
banking crisis as a result.
(2012 Note: It has been recently reported that as many as
50% of sales in Florida are all-cash. This could be an indication
that a bottom is near, as cash investors move in to buy up excess
housing supply.)
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