Barry Ritholtz’s column in the Sunday Washington Post is all about why — despite what may seem to be obvious signs — there really isn’t a housing recovery in the works. Those signs, he argues, show up every spring.
"Ahhh, winter is finally over," he writes. "Each year about this time, flowers push up through the soil, trees begin to bud – and the stories about a real estate recovery appear."
He’s got three arguments against it:
- There’s too much shadow inventory lurking in the, um, shadows.
- Homes aren’t realistically affordable, because families can’t both come up with a down payment and qualify for a mortgage.
- Prices are still falling, albeit more slowly. But historically, following a bubble comes a trough: "We have never seen a stock market run up into bubble territory and then revert to fair value. Instead, we careen wildly past that level, to deeply undersold and exceedingly cheap."
"Until that happens," he argues, "houses will stumble along the bottom of the price range. The nation could easily see another 10 percent to the downside – assuming nothing else goes wrong."
I like Ritholtz, and I usually find his thinking to be spot on. But not so much this time, for a few reasons.
First, no one is sure how much shadow inventory there is, nor what effect it’s having or will have. Ritholtz himself writes, "estimates of potential shadow inventory run as high as 10 million." As high as. Meaning it could be much, much less.
Nor is it clear what’s going to happen to it. The idea of investors bulk-buying property to turn into rentals is new, as are various rent-to-own schemes being tried and offered by lenders. In other words, it’s a multi-variable problem, and it’s hard (if not impossible) to predict how it will play out.
Second, housing isn’t as unaffordable as he seems to think. "Most [families] simply do not have the $40,000 to put 20 percent down on a median priced house." But they don’t need it. FHA will take 3.5%. Heck, my credit union only asked for 5%, and my credit score is nothing to write home about.
So that "most don’t have 20 percent" argument is a straw man — it’s true, but it’s not applicable.
Finally is the issue of prices falling. Ritholtz uses the example of a stock-market correction to argue that housing prices will have to drop below fair value before stabilizing again. Maybe so, and pendulum swings aren’t unusual.
But housing isn’t stocks; it’s an unfair comparison.
There aren’t a lot of government programs trying to make stocks more affordable. Nor are there investors looking to buy stocks only to rent them out.
You can’t live in a stock portfolio, either, so there’s no reason to hold onto bad-performing securities. But a house, on the other hand, still has value even when it’s losing it — you live there. Your kids go to school nearby. You have friends in the community.
And you don’t have to own stocks, but you do have to have a place to live, whether you rent or own.
Bottom line: Just because stock prices swing wildly doesn’t mean housing prices will.
That’s not to say housing prices won’t drop more. Case-Shiller has shown that over the last 100 years, housing prices have remained pretty much at the same level (adjusted for inflation), aside from the occasional bubble. And we’re still a bit above it.
A housing recovery isn’t going to appear suddenly the way the bubble burst. It’s going to be slow — fits and starts. A bit of good news here, a bit there. Just like we’re seeing now. Unemployment is dropping. Consumer confidence is up. Housing price drops have slowed.
So it’s back to my favorite Churchill quote: "Now this is not the end. It is not even the beginning of the end. but it is, perhaps, the end of the beginning."