The American dream will continue to endure despite the catastrophic drubbing that the nation’s housing market has taken since 2005, Karl E. Case, an economics professor at Wellesley and co-creator of Standard & Poor’s Case-Shiller housing index, writes in the Sept. 1 issue of The New York Times.
At a time when many in the news media have been suggesting that the nation’s commitment to homeownership should be abandoned, Case, in an article entitled “A Dream House After All,” says that the effect of homeownership on household wealth “has been huge” and that today’s market offers many significant advantages for prospective buyers.
“Do the math,” he writes. “Four years ago, the monthly payment on a $300,000 house with 20% down and a mortgage rate of about 6.6% was $1,533. Today that $300,000 house would sell for $213,000 and a 30-year fixed-rate mortgage with 20% down would carry a rate of about 4.2% and a monthly payment of $833. In addition, the downpayment would be $42,600 instead of $60,000.”
Even before calculating the capital gains from the sale of a house after it has appreciated over the years, the “net imputed rent from owner-occupied housing,” or the value of being able to live in it and receive “a real flow of valuable services,” he writes, “is the equivalent of about a 6% return on your investment after maintenance and repair, and it is constant over time in real terms.
“Consider it this way: when Enron went belly up, shareholders ended up with nothing, but when the housing market drops, home owners still have a house. And this benefit is tax-free.”
About two months ago the housing market appeared to be turning around, according to Case. The expiration of the housing tax credit at the end of April and household formations that have been suppressed by the recession and such factors as immigration and emigration are likely partially responsible for the lull in the markets this summer.
But “one important reason for the recent downturn is clear: The steady drip of bad news about the economy has sapped the confidence of buyers, sellers and lenders,” Case writes. “And there is no understating the importance of expectations and confidence in this industry.”
In his article, Case also points to signs of improvement for housing.
A survey that he and economist Robert Shiller conduct annually among 2,000 recent home buyers in San Francisco, Los Angeles, Milwaukee and Boston show that consumers are expecting to see the value of their houses rise over the next year.
In 2005, those participating in the survey felt that prices would rise an average of 9.6%. In 2008, they anticipated a small drop. In 2010, they expected an average gain of 3.2%. A survey tabulated this spring found an anticipated gain of 5.2% in the year ahead.
“In a given year, the number of completed sales is about 4% to 5% of the housing stock. Thus it doesn’t take a change in mood of a large number of buyers to change the overall direction of the market,” Case writes.
“The financial crisis has made us all too aware that we live in a Catch 22 world: the performance of the housing market drives the economy, and the performance of the economy drives the housing market. But housing has perhaps never been a better bargain, and sooner or later buyers will regain faith, inventories will shrink to reasonable levels, prices will rise and we’ll even start building again. The American dream is not dead — it’s just taking a well-deserved rest.”
Mortgage Rates at Historic Lows
Definitely working to the advantage of home buyers in recent weeks has been a continuing downward trend in mortgage interest rates.
In the results of Freddie Mac’s Primary Mortgage Market Survey for the week ending on Thursday, Sept. 2, 30-year fixed-rate mortgages reached yet another record low, falling to 4.32%. This was the 10th time in 11 weeks that rates hit a historic low.
Amy Crews Cutts, Freddie Mac’s deputy chief economist, said that mortgage rates have remained so low because overall inflation expectations are “well at bay” and should remain so for some time.
She also reported good news from the S&P/Case Shiller National Home Price Index. She said that house prices “appear to be firming;” they rose 2.3% between the first and second quarter of this year, reaching the highest level since the fourth quarter of 2008, according to the index.
“In addition, 15 metropolitan areas in the 20-City Composite Index experienced annual house price growth in June, compared to 13 in May and 11 in April,” Crews Cutts said.