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Needless to say a lot of people these days
are questioning the value of their homes. With sales and median
prices down, with inventories up, and with days on the market
increasing, there are very good reasons for people to be
uncertain about values.
For years and years homeowners have
assumed that the value of their homes would constantly
increase. And, for years and years, values did increase for a
variety of reasons:
1. Government subsidies – the home
mortgage interest and real estate tax deductions.
2. Free-wheeling credit
3. Expanding demand from immigrants and
young Americans coming of age who were able to buy.
4. The psychology of constantly rising
prices – leading to more rising prices.
Now, however, with the exception of
government protection for the homeownership deductions (believe
it or not, there was discussion in Congress only three years
ago to do away with this deduction), all of the above factors
driving to the housing
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value increases are in question.
I certainly don’t need to spend a
lot of time on easy credit. We all know the impact this had in
the housing world – and the impact on people’s
lives today as interest rates rise above the teaser level and
credit tightens.
There will always be demand for American
housing but restrictions on immigration and a worsening economy
will depress on demand and therefore values.
Finally, and this is perhaps the most
frightening, the psychology of housing expectations is
changing. While once people believed that values would
always climb, today no one knows what is going to happen in the
future and people refuse to buy because they fear that values
are still falling. This, of course, then becomes a self-fulfilling prophecy for as people expect prices to fall, they do not
buy, and that causes prices to fall. Although not
measured specifically in terms of housing values, consumer
confidence today is as low as it has been in twenty-five years
and that does not help!!
The other issue with housing is that it is
one of the few
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investments most people make which is not tied
to some type of income generation. People put money in a savings
account, a stock paying a dividend, or a bond because they have
expectations of return. When people bought stocks based on just the
prospect of appreciation (remember the technology craze) hundreds
of millions of dollars were lost. But that is the exact decision
made when people buy housing – no one buys a home based on a
rental or net income analysis – it is all about appreciation.
And that is, in part, the reason that housing values are so
fragile, for when the fundamentals pushing appreciation change,
there is no fallback and house prices can free fall.
The good news is that housing is not
perceived as just an economic decision – rather it is a
lifestyle choice and in my opinion that fact will keep housing
values from serious declines. The fact is that people still desire to live
in houses, whether economically sustainable or not.
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