What happens after our housing bubble collapses?

Stephen Moore just published a good article forecasting a repeat of the 2008 collapse of the housing market.  Political meddling in what should be a free and fair market is likely to lead to a déjà vu financial crisis.  As if we weren't wallowing in one now.  The point is that the fiends in D.C. are poised to make things worse.

Having been a licensed real estate agent since 1995, I have some inside, eyewitness experience on the subject.  Primarily, bubbles are supposed to pop.  Financial trends tend to have momentum, which often leads to overshooting the reality of the market.  At the tail end of a seller's real estate market, new listings tend to go on overpriced.  This is because analyses of comparable sales will often be extrapolated using the known appreciation trend, which has already run its course.  This is typically manifest as an increase in the days on market statistic.  A veteran agent once told me that there can never be anything wrong with a property that lowering the price cannot fix.

The political motive for screwing up the real estate market derives from a knee-jerk tendency to pander to the inner-city minority population.  They want to have more home ownership among the less credit-worthy.  Thomas Sowell, in The Vision of the Anointed, puts forth a really inconvenient fact: prior to the "Community Reinvestment Act," inner-city minority homeowners had exactly the same foreclosure rate as white folks — the point being that traditional underwriting criteria were colorblind.  But that didn't stop the demagogues, did it?  Nowadays, there's scuttlebutt going around about the (ahem) federalization of real estate appraisal.  After all, there's still not "adequate" minority home ownership...and the appraised values deserve to be tweaked in order to balance the equation.

How people house themselves has evolved over the years.  Technology has had a major impact.  The Second World War stimulated the development of really efficient building techniques that, in the post-war period, led to sprawling subdivisions.  Prior to that, the automobile allowed for a rise in sub-­urban development, where horse barns morphed into garages. 

Economics has also influenced the process.  First came the twenty-year mortgage that reduced the monthly "nut" that homeowners must face.  Eventually, this led to the thirty-year note.  High interest rates spawned the adjustable mortgage, so borrowers could automatically take advantage of lowered rates once they'd passed their peak.  Also came condominiums, where individual apartments could be bought outright.  These are often in particularly desirable locations, where the cost of the "dirt" underneath the building is distributed over the many units.

The latest trend is for homeowners to add an accessory dwelling unit (ADU) to their property.  During WW2, places such as the Bay Area had a tremendous influx of new residents, who came to work in war-related industries.  "In-law" units provided the necessary in-filling as building codes were relaxed due to the obvious national emergency.  Nowadays, ADUs are filling a similar need.  There are even companies that install pre-fab units in order to hasten the process.

From the standpoint of a prospective home-buyer in today's price environment, there's an interesting option.  Tenancy in common (TIC) allows for the financial combination of multiple households.  Houses with ADUs and even duplexes, triplexes, etc. can be more easily bought when the purchasing power of two or more families is combined.  The participation does not have to be anywhere near equal.  This technique has been used for years where local authorities are reluctant to allow for condo-conversion.  There is, however, a catch.  Tenants in common cannot escape mutual responsibility for all expenses (mortgage, taxes, insurance, and maintenance).  The solution to this is fairly obvious: the multiple households should already be either good friends or close relatives.

Like politics, as according to the late Tip O'Neill, all real estate markets are local.  The main driver of demand is local job creation.  Over time, the intense necessity of having a home has facilitated all kinds of innovation and adaptation.

Image: Chris Dlugosz via Flickr, CC BY 2.0 (cropped).

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