Unforeseen Hurdles for the Housing Market?

by | BiggerPockets.com

The housing market has traced an impressive recovery over the last three quarters, and all forecasts predict that Q2 2013 will be an exceptional period for the property sector as well. Earnings reports last quarter were tremendous and largely outstripped analyst expectations- a pattern that emerged with both homebuilding corporations as well as major lending bodies. The rise in housing prices continues to accelerate, and has reached the point where as of Q1, year-over-year housing prices had risen at the greatest rate since 2006. However, more skeptical observers have questioned the ability of the housing sector to continue its recovery or even sustain economic stability in the coming years.

One of the more questioning pieces was penned by Jessica Love at The Atlantic’s Quartz publication. Citing comprehensive studies of various nations’ housing markets, Jessica Love’s report noted that growth figures often ended in the floor collapsing as much as they led to continued ascent. Noting that not all of the analyzed housing markets underwent a crash following property sector growth, particular trends emerged among those that did experience and ensuing plummet.

What’s the Difference?

Among the various trends that can keep a housing recovery alive, the willingness of future generations to invest in property plays a special role. Essentially, there must be generationally carryover for housing growth to be sustainable. If interest in property purchase remains segregated to the mid-life buyers, then the various consequences of economic momentum will have to be shouldered by their children or a rising generation of young adults. Not only will young adults need to follow purchasing patterns similar to prior generations, but they must also be able to shoulder elevated property values.

It goes without saying that the current generation of young adults in the United States are juggling both harsh job prospects and enormous debt- a particularly weighty combination. Considering the nature of property as an asset, macroeconomic trends and consuming leanings need to roll over into the next generation for housing growth to maintain.

How Can We Avoid the Worst?

The Atlantic quartz pieces notes that time, nationally localized housing markets undergo an uneasy boom-bust cycle where growth is met by a disastrous tumble, which is then followed by accelerating growth. These fiscal cartwheels may not be too disastrous while viewed from a decades-long retrospect, but they can spell deep trouble for individual investors or particular demographic segments. Oftentimes these cycles are motivated precisely by discrepancies among the latter- certain segments of the population with expendable windfall capital or an exceptionally optimistic market perspective invest bullishly and subsequently ratchet prices. This does well for real-estate backed growth funds and certain property investors, but can yield enormous strain for homeowners seeking to simply maintain a mortgage or put down for a first purchase. As I’ve noted in a prior post, there’s been much speculation that recent gains in the U.S. housing sector have been at least partially orchestrated by hedge funds.

All skepticism aside, it seems the best way to avoid an eventual housing bust is to ensure the economy is healthy enough that tomorrow’s homebuyers have the financial security (or at least financial capital) to purchase homes and sustain mortgages. The combination of elevated prices and increased consumer demand is only dangerous if it flags too suddenly. If today’s young adults have the mean to develop stable assets and sustainable careers, then their engagement with the property sector will allow for stabilization down the line.

Photo: InAweofGod’sCreation

About Author

Harrison Stowe is a writer for NVR Inc., a prime developer of Baltimore new homes. Addressing a range of topics including investing, mortgages, and real estate, Stowe combines finance knowledge with additional experience working with Ryan Homes in the current real estate market.

1 Comment

  1. I have quite a few young buyers in their late 20s. In SoCal, we are talking about prices starting in the $300,000s which is not small change for people just starting jobs and careers. They are very optimistic even though I try to temper their enthusiasm with warnings that the market is high, there are no guarantees it will continue to go up and they better plan on living in the house for quite a while to build equity, etc. But then I think back to when I was that age and I graduated college in the early ’80s recession and unemployment was over 10%, and I had incredible confidence and optimism. I think that just comes with being young.

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