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The housing bust that ain’t

September 28, 2006



The headline hints of catastrophe: a dot-com repeat, a bubble bursting, an economic apocalypse. Cassandra, though, can stop wailing: the expected price corrections mark a slowing in the rate of increase — not a precipitous decline. This will not spark a chain reaction that will devastate homeowners, builders and communities. Contradicting another gloomy seer, Chicken Little, the sky is not falling.

Let me alleviate some fears.

Fear One: Prices will plummet.

From the start, the much-vaunted housing "boom" was an uneven phenomenon, driven by a strong demand for housing, coupled with constrained supply, particularly on the two coasts. In much of the nation, housing prices rose modestly; in a few areas, prices did not budge.

In those overheated markets _ often fueled by immigration _ prices were rising by as much as 20 percent a year. But even with soaring demand and limited supply, that escalation was not sustainable. Even with too-good-to-be-true mortgages, people cannot afford to buy homes that cost five times their income.

So in those overheated markets, moderation is expected. Moderation means that prices will stop rising at meteoric rates: The homeowner who expected a double-digit profit after one year will be disappointed. A home will once again be more of a domicile, rather than an investment. In some regions, prices will flatten, rising around the inflation rate, which is the historic average. The fundamentals behind high prices _ strong demand (more households will form in the next decade than in the last) and constrained supply _ persist.

Fear Two: The economy will collapse.

Housing now represents over 20 percent of the gross domestic product (compared with 18 percent from the manufacturing sector). For most families, the investment in a home constitutes de facto savings: the build-up of equity is in the trillions of dollars. And homeowners have tapped into that equity, using their homes as ATM machines for refinancing and home-equity loans.

Consequently, we are "well-housed." Indeed, two bathrooms, air conditioning, garages _ the amenities our grandparents called luxuries _ are standard.

All this activity has fueled consumer spending.

A Cassandra fear is that as home prices moderate, the moderation will show up in the gross domestic product. Yet, again, moderation is not a free-fall. The housing market will adjust slowly, with fewer sales and starts. History tells us that housing booms are not eternal _ that most end _ enabling incomes to catch up with prices.

Furthermore, builders have been building to meet demand. In regions where the number of households is growing, so is the need for housing. That demand will not slake. So the incentives for developers remain strong. We will see more construction over the next decade than over the last _ and the last decade set a record.

Of course, Cassandra has not been the only one watching housing prices fall. Some Pollyannas have cheered the fall, predicting that at last housing will become more affordable: The $200,000 home will go for $150,000; the $150,000 home (in some parts of the country, this is a rare ramshackle) will go for $100,000. Renters desperate to buy into the American dream yet lacking the down payment _ much less the income to finance a mega-mortgage _ will get their raised ranch. And as more middle-income renters buy homes, the shortage of rental housing will ease; rents will drop; and the "affordability" crisis will fade.

Pollyanna, though, is shortsighted. Yes, some would-be owners, previously shut out of the market, may at last buy a home. But the "affordability" crisis will persist _ exacerbated by rising interest rates.

The working poor face their own income-and-expenditure imbalance: Their incomes fall short of their need for housing, food, transportation and health insurance. They will still be hard-pressed to pay for a basic apartment close to their jobs. If the market "self-corrects" in the fast-growing parts of the country, that self-correction will not trickle down far enough to help the Wal-Mart clerk or diner waitress.

In our new economy, low-wage jobs are growing. These people will still need public intervention.

Cassandra can stop wailing, and Pollyanna can stop cheering. Home prices in some regions are moderating, but for a nation inured to CNN’s headline-of-the-moment, this moderation does not rate high on the Richter scale of cataclysm.

(Nicolas P. Retsinas is director of the Joint Center for Housing Studies at Harvard University.)

12 Responses to The housing bust that ain’t

  1. Mugsy

    September 29, 2006 at 1:05 am

    I left the Herndon Virginia area last summer and headed back to Texas. The Herndon area (and the rest of NoVa) was destined to come plummeting down. How could anybody afford to live there? I was making over 90K and had no hopes (or desires) of ever buying one of those rat traps in Sterling or Herndon that listed for 500K.

  2. mrnome201

    September 29, 2006 at 7:30 pm

    “Even with too-good-to-be-true mortgages, people cannot afford to buy homes that cost five times their income.” And then he states that prices will remain flat or rise gradually – not at the 20% yearly pace in the recent past. Mr. Harvard Professor, let me ask you a question, How will the family buy an even more expensive house if they can’t afford it?????

    Let me answer – they won’t and sellers will be forced and they are being forced to cut prices….this will be a housing depression….

  3. winjr

    September 30, 2006 at 12:03 am

    “Renters desperate to buy into the American dream yet lacking the down payment _ much less the income to finance a mega-mortgage _ will get their raised ranch.”

    Man, I’ve read some really ridiculous statements from the REIC cheerleaders, but this one takes the cake.

    Don’t get out much, do you, Retsinas?

    The fact is that your mortgage industry buddies set the table so that anybody who can fog a mirror can qualify to buy a home just about anywhere.

    You know … those no-doc, income stated, nothing done, servitude-for-life gems.

    Sorry, pal. Anybody who wanted to buy, already has.

  4. Mugsy

    September 28, 2006 at 3:31 pm

    Seems that the sponsors of Mr Retsinas’s Harvard think tank are all builders, realtors and building supply companies. Who do you think he’s going to favor in the bubble debate? Shame on you Mr. Retsinas.

  5. Mugsy

    September 28, 2006 at 3:32 pm

    Seems that the sponsors of Mr Retsinas’s Harvard think tank are all builders, realtors and building supply companies. Who do you think he’s going to favor in the bubble debate? Shame on you Mr. Retsinas.

  6. Mugsy

    September 28, 2006 at 3:44 pm

    Naughty, naughty Mr. Retsinas! Why don’t you tell people about who pays you before you tell your lies?

  7. autonomedia

    September 28, 2006 at 4:27 pm

    Agreed, Mugsy, and Capitol Hill Blue should know better!

  8. Poshboy

    September 28, 2006 at 5:14 pm

    Another RE shill. If you want the truth, check out

    It’s an aggregator of news stories from around the country. The comments section is priceless.

    Things will be as bad as common sense will lead you to believe, regardless of rah-rah comments from a Harvard professor.

  9. CB

    September 28, 2006 at 6:06 pm

    There are so many houses for sale and too few buyers. The prices have fallen below what many now owe.

    What planet does Retsinas live on?

  10. tashi

    September 28, 2006 at 6:39 pm

    Well, I visited an open house in Houston listed for 230K. The realtor dropped the price twice in a week to 220K. Now they are on their third open house. And down to 210K? Nice place. Good neighborhood. And many homes for sale there.

  11. Ann

    September 28, 2006 at 7:16 pm

    Roughly half the houses in my small ME town are up for sale. Most have been on the market for well over a year. Not one sold in the past year–despite massive price slashes. Since what housing is only ever worth what sales price it will bring–spin your propaganda to “true believers”, dreamers, or those who lack having current listings on the market. Don’t count me in that group.

  12. moira kelly

    September 28, 2006 at 11:01 pm

    I publish a real estate magazine in the Washington DC metro area. I wouldn’t call it a bust – yet. But it is heading that way. A few things:

    1. Foreclosures and auctions are up – a sure sign of serious distress.

    2. Creative mortgages – many of these buyers were marginal to begin with. Many of them are putting their houses on the market – and having to bring money to the table – money most of them don’t have.

    3. No one wants to be the last person to pay too much in a community. Buyers are waiting and waiting.

    4. My clients are telling me that this is the worst transition market they have ever seen. Some of these guys have been in the business for 30 years.

    5. I know an agent who lost her house because she hadn’t sold a property this year. Another agent bought up a bunch of properties for investment – and has lost one of them to foreclosure. Stupid yes, but there is much much more of this to come.

    6. I’m seeing 20% drops in asking prices. Sounds like a bust to me. I client in WV told me today that his market has crashed. That’s his word: crashed. AND he’s taking $40,000 out of his savings to live on.