Is There Really A Real Estate Bust Ahead?

2006 Great Earthquake in San FranciscoThere are a number of signs that the real estate marketplace has begun to stall. Yes there are bright spots but on the whole things are hardly rosy.

“After a decade of boom-bust-boom,” says Bloomberg Businessweek, “the U.S. housing market is going downhill just when many economists thought it would be heading higher. Sales of previously owned properties tumbled 7.5 percent in March from the previous year, to the slowest pace in 20 months, while purchases of new houses sank 14.5 percent from February. And applications for mortgages to buy homes are down 21 percent from this time last year, indicating fading demand during what is typically the busiest season for deals.”

In a news release headlined Latest NAHB Index Reading Shows Recovery Continues to Spread, the National Association of Home Builders reports that for April “of the approximately 350 metro markets nationwide, 59 returned to or exceeded their last normal levels of economic and housing activity”

In other words, in April approximately 291 metro markets have not returned to or exceeded their last normal levels of economic and housing activity.

The Real Estate Bust or a New Era of Common Sense?

The view here is not so gloomy. It’s not that real estate is heading for a pit of eternal stagnation, instead people are making more realistic choices and those choices are changing the marketplace.

Consider mortgages. We have more people every year and yet mortgage debt keeps declining. The Federal Reserve says that in 2007 American homeowners had mortgage debt worth $10.6 trillion, a number that fell to $9.3 trillion by 2013. Why is this happening?

One reason, according to Freddie Mac, is that “borrowers continue to choose products that strengthen their home equity when they refinance. During the first quarter of 2014, 83 percent of homeowners that refinanced either left their loan balance unchanged or paid down their balance at or before refinancing. Further, 39 percent of homeowners refinanced into a shorter term fully amortizing loan, to pay down principal and build home equity faster than on their previous loan.”

Rightsizing Real Estate

What will your friends and family think if you don’t have a McMansion large enough to quarter the entire population of Omaha? Who cares. A smaller mortgage, a smaller tax bill and less to clean, heat and cool are visible advantages that people increasingly prefer.

The real estate “problem” we’re seeing today is that supply and demand are mismatched. It’s not that there are too many homes for sale or too few, it is instead a shortage of homes that are just right for real households with real bills and with incomes which are today 9 percent lower than they were in 1999.

Welcome to the new world of real estate realism. Your parents didn’t need a starter mansion with almost 2,700 sq. ft. of living space and the odds are you don’t either.

What we’re seeing is not a decline in real estate enthusiasm but instead a marketplace which is rightsizing, an expression with big consequences for us all.

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