September 10th, 2010

Adjust your expectations for home sales



“The concept of ownership is far from dead, but the Wild West approach to financing it is dead’’
-Jack Manning (co-founder of real estate investment company Boston Capital)

Post housing bubble, home sales were so dead that Washington developed a tax incentive for Americans to buy homes. You may remember it, it was called the homebuyer tax credit (and we’ve had more than one of them). Even with the tax credits, home sales remained low. The drop off in sales we’ve witnessed after each of the tax credits have expired have been so pronounced that Washington has even considered rolling out the homebuyer tax credit for a third time.

Paul McMorrow, associate editor of CommonWealth magazine and a Boston Globe columnist, says that the low levels of home sales aren’t something that should necessarily shock or even scare us. He writes that the significant drop in home sales have to do with more than just the country’s ongoing economic struggles and the “post-tax-credit hangover.” McMorrow writes that the lack of sales is “also evidence of a fundamental shift in national housing policy.”

The old way

America has always been a country that prides itself on the idea of homeownership. In the middle of this decade, just before the housing bubble burst, homeownership rates were the highest they have ever been. People were getting into homes without having to put up much of their own money because the notion that home prices would keep rising made it seem like a worthy investment:

Those were symptoms of an unsustainable, unhealthy, and hyper-inflated housing market — a market fueled by lax lending standards, fraud, and a near-total aversion to risk retention. Sales rose because money was easy to come by, and money was easy to come by because lenders weren’t the ones on the hook when mortgages went south. That’s no baseline to measure against.

The new way

Mortgage lending is a whole new game these days. Underwriting standards are much higher and lending restrictions are far tougher. It speaks volumes that mortgage rates are hovering at their lowest levels in over five decades, yet millions of consumers can’t access these rates:

Federal officials have decided to let homeownership rates find their pre-bubble level. They’ve made lending tougher, not easier. They’re laying plans for a smaller government role in the mortgage market.

Plain and simple: the lending practices that led to the bubble are no longer in place, so it stands to reason that, as long as they aren’t, home sales and homeownership rates are unlikely to return to what they once were. As McMorrow suggests, we can’t measure ourselves moving forward against the pre-bubble era — “That’s no baseline to measure against.”

The consensus among many market observers is that the August home sales numbers won’t be much better than those in July (July’s numbers set record lows). Furthermore, the consensus of many, including McMorrow, is that even in the coming years, home sales won’t be substantially improved from where we stand now.

So while we still don’t know how this country’s housing market will ultimately shape up, the new frontier of mortgage lending and the seemingly new-found realization that perhaps this country should consider promoting renting to a greater degree, means that home sales might never “recover” from what they were five years ago…and by some reckonings, that’s OK.

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About the HSH Blog's daily blog focuses on the latest developments in the mortgage and housing markets. Our mission is to relate how changes in mortgage rates and housing policy, as well as the latest financial news, impacts consumers, homebuyers and industry insiders alike. Our 30-plus years of experience in the mortgage industry gives us an edge as we break down the latest changes in an ever-changing market.

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Tim Manni

Tim Manni is the Managing Editor of and the author of their daily blog, which concentrates on the latest developments in the mortgage and housing markets.

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