Stocks markets come and go, but we always love our homes.
One reason is simple bulk. More Americans own homes than own common stock. Most people have more at stake in the real estate market than in the stock market. Indeed, until household net worth exceeds a lofty $500,000, home values are, well, the ballgame.
So it shouldn’t have surprised me when a lot of e-mail followed my August 12th column on whether housing was “the other bubble.” The flow increased after the September 3 issue of Forbes magazine pictured a couple whose Los Altos California house had lost $1 million in value. The magazine cover asks, “What if home prices crashed?”
Most readers had a simple question: “Should we sell now?”
Others asked, “Should we put off buying?”
Answering those questions isn’t easy because most home ownership decisions are more personal than economic.
At the most impersonal level homeownership appears to be a lead pipe cinch. If you examine the national median resale price for existing homes since 1970 what you see is an unbroken progression from $23,000 to $146,900 in the second quarter of this year. While some years have had smaller increases than others, the long-term rate of increase has been about 6 percent a year. That’s slightly better than the rate of inflation over the period.
Unfortunately, these figures are like the proverbial pond with an average depth of one foot— you can still drown in the deep spots. The oil bust losses and foreclosures that filled Texas, Oklahoma, Colorado in the late eighties aren’t visible. Nor are the aerospace/defense phase-downs that hit Southern California.
The National Association of Realtors also provides four regional indices— the Northeast, Midwest, South, and West. Like the national index, the indices for the Midwest and South are a steady progression. The Northeast and West tell a different story. Both areas have experienced periods of sagging prices.
In the West prices peaked at $147,200 in 1991. They bottomed at $142,600 in 1993 and surpassed their 1991 high in 1995 at $148,300. Since then prices in the West have spiked upward, reaching $193,900 at the end of the second quarter.
The slump in the Northeast has been more pronounced. Prices peaked at $145,200 in 1989, having spiked sharply from the early eighties. After 1989 prices didn’t bottom until 1995. The loss was 4.2 percent.
Prices only surpassed the 1989 figure in the second quarter of this year. This means home prices in the Northeast have been soggy for more than 11 years. That’s longer than most people own their homes.
Add the cost of selling a home— about 7 percent of its market value— and you start to get a sense of vulnerability.
Query: who’s vulnerable?
Answer: Anyone who needs to sell.
If you own your house with little debt, have a secure job, and are unlikely to move, you’re a strong holder. If you have a lot of debt, don’t have a secure job, and are likely to move, you’re a weak holder.
And there’s the rub.
The weak holder population has been rising faster than the strong holder population. Some of the weakness comes from over-leveraging as homebuyers put down smaller down payments and borrowed more. Additional weakness comes from the rising volume of home equity credit lines. Still more comes from raw circumstance— the implosion of technology capital spending, the developing contraction in financial services, and the weakness in manufacturing. As a result, housing prices will be under increased selling pressure. More people will need to sell than will need to buy.
Does this mean you should avoid the rush and sell your home now?
Hardly. Weak or strong, you don’t sell your home because the market is up or down. You sell it when your personal circumstances make it appropriate because it is your home.
Should you defer a home purchase?
Yes, unless it’s a very special deal or you’re confident that you’ll own the house for a relatively long time.
This information is distributed for education purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, product, or service.
Photo: Terry Magallanes
(c) Scott Burns, 2022