Everywhere you look, people are saying that housing is recovering. But exactly what is a housing recovery?
Think about it… does a housing recovery mean a return to peak bubble home prices? Or peak number of existing home sales? Or peak new home sales? Or contribution to GDP?
Does it even mean a return to “peak” anything, because “peak” of all of that stuff was too much?
Do we really want to “recover” to peak anything?
Or, does a housing recovery simply mean a return to a “normal” market? What does that even mean?
Let’s break each of these topics down and consider what I consider to be a true housing recovery: the return of liquidity so people can actually buy or sell when they want to.
Home Price Recovery
Home prices are recovering, but are still well-below peak pricing. With every dollar more expensive homes become, the less-affordable they get. And, that means that the next buyer would have to spend more money each month on interest payments and therefore have less to save or spend at local restaurants or other more economically-productive uses.
Once the recovery is complete, we can say the market has “recovered,” which sounds somehow like success. But is inflating the housing bubble again really success?
Or are we just setting ourselves up for another collapse? Besides, should any of us really be rooting for housing in this country to be less-affordable? Shouldn’t it be the other way around?
And it that case, maybe the actually “recovery” was falling home prices. They were recovering from insane peak prices to actual, healthy, affordable levels.
But what about affordability indexes and price-to-rent ratios? Home prices are close to their historical ratio to rents, right?
I don’t place much stock in either measure. Rents are artificially high right now. And and affordability is artificially high because of unsustainably-low interest rates. Neither of these conditions will last forever.
Existing Home Sales Recovery
Existing home sales are also slowly recovering, but are still only about half of what they were at the peak. Certainly during the bubble we had too many people buying multiple homes that they couldn’t afford… do we want the market to be “on fire” again?
New Home Sales Recovery
Do we really want to return to peak sprawl-construction? It would be great for GDP. Or do we really just want to recover to a historical norm?
The True Housing Recovery: A Liquid Housing Market
In my opinion, a “recovered” housing market is one that actually functions. Sellers have equity and can sell and move if they want to. And Buyers can buy homes at affordable prices when they want to. It’s when people can do what they want without having to worry about negative equity or housing bubbles.
To reach this type of recovery, we don’t need the housing boom to come back. In fact, we need the bubble to finish it’s popping.
Think about it… if prices keep rising for the next few years as they did in 2012, we’ll be back to peak bubble prices by 2014 or 2015. Housing problems solved, right? Negative equity gone, right?
Except now houses aren’t affordable again. And, once the buyers reach their limit, demand fades and prices (and equity) collapse. Peak bubble prices aren’t sustainable or healthy… they would just give current homeowners another chance to find a greater fool. Negative equity doesn’t go away, it just eventually gets transferred from one person to another.
So, how do we achieve liquidity without forcing prices higher to eliminate negative equity?
The Only Actual Way The Housing Market Can Recover
How can negative equity go away so Sellers can sell? But with prices still affordable so Buyers can buy?
The only way to achieve this is to eliminate debt. Forgive loans or destroy them via foreclosure, short sale, or even bankruptcy.
The reason our housing market hasn’t recovered to a more liquid state isn’t that home prices are still too low. It’s that current debt levels are still too high.
To me, a housing market recovery means housing market liquidity. And the only way to achieve stable, lasting, legitimate liquidity is to drastically reduce mortgage debts. Then Sellers could sell, inventories would rise, prices would stop bubbling up again, and everyone wins.
If you agree that a healthy, recovered housing market is a liquid one, then it’s worth reconsidering the entire housing crisis and the steps we’ve taken so far to “recover.”
The next time you hear a talking-head say that the housing market is recovering, you’ve got to stop and consider which aspect of housing they are referring to. Then you have to ask yourself if that type of recovery is even something to be happy about.