Why Are Real Estate Expectations Falling?

The Fortune TellerThere’s a lot of worry in the real estate industry because it turns out that 2014 is not shaping up as the year of expansion that many had expected. But why should anyone be surprised? Sure the economy is rebounding, but it’s not rebounding equally across the country.

“Of the approximately 350 metro markets nationwide, 56 returned to or exceeded their last normal levels of economic and housing activity,” according to the National Association of Home Builders/First American Leading Markets Index.

Of course, the very same index shows that more than 290 metro areas have not returned to or exceeded their last normal levels of economic and housing activity.

Many consumers no longer see real estate ownership as a sure thing, an essential step in the wealth-building process. Having lost their homes or suffered great stress as a result of the foreclosure meltdown and weak economy, many potential buyers believe real estate ownership is simply not worth the bother. If the expectation is that a home is simply shelter and not an investment vehicle then why is it not advantageous to seek the form of housing which represents the lowest possible cost, especially in the short term?

Real Estate and Expectations

A big part of the problem concerns the idea of “expectations” and what happens when bogus benchmarks are not met. On Wall Street, for example, there’s a constant drumbeat to do better and better each quarter even though perpetual good news is not possible. Merely having profits quarter after quarter is no longer enough, one has to have bigger profits to satisfy analysts and pundits.

The catch is that it’s not only Wall Street commentators who have expectations. The public also has a right to look ahead and for many what they see is hardly inspiring.

A new report by Hart Research for the John D. and Catherine T. MacArthur Foundation suggests that a majority of the population now believes renting is a more logical housing option than ownership. It’s not that homeownership is undesirable, rather it’s the thought that real estate is no longer the engine which produces household wealth over a period of time.

“The American people believe that the country’s housing environment is changing,” says the report, “While most non-owners (70%) aspire to own a home someday, homeownership is not viewed as the vehicle to building wealth that it once was, and the public believes that renting has grown in appeal while owning has declined. Two-thirds of the public (64%) believes it is less likely today than 20 or 30 years ago, for a family to build equity and wealth through homeownership.”

“Today,” says the report, “nearly 6 in 10 adults (58%) believe renters can be just as successful as owners in achieving the American Dream.”

Will The Real Estate Doldrums Continue?

Despite the MacArthur study it’s possible that ownership could become more attractive as a result of continuing low mortgage rates as well as a return to the market by many who have been excluded during the past few years.

“As home prices improve and lenders loosen restrictive lending guidelines, there is a wider pool of borrowers that are able to qualify for a loan,” said Doug Lebda, founder and CEO of LendingTree. “Potential borrowers with a solid financial portfolio who may not have qualified for a mortgage two years ago may find it easier to qualify today. And with rates still historically low, we could see an active home-buying season.”

The housing market is not separate and apart from the economy. If you want to sell more houses, if you want prices to rise, if you want to restore the American Dream, then more people must first have good jobs with higher incomes. Right now the Census Bureau says 2012 household incomes were 9 percent lower than in 1999, a reality which must be overcome before real estate sales will materially pick-up.

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