For anybody thinking about buying a home as an investment, the week started with a bad report that continued a years-long trickle of news to discourage homeownership.
Valley home values fell 8.4 percent in the last year, making for a total plunge of 55.9 percent since the peak in 2006. That makes the Valley’s fall the largest of the top 20 metro areas, according to the S&P/Case Shiller Home Prices Index.
The nationwide plunge in real estate values has triggered some experts to say it now makes more sense to rent than own, challenging the idea that homeownership is an essential part of the American dream.
Housing experts say ownership will continue to decline for years as a result of the housing crisis. A backlog of foreclosures looms, possibly lasting years. Many people heavily damaged their credit and will be out of the market for a long period. Some young families may be leery if their parents went through the agony of losing their home.
But a decreasing number of homeowners isn’t necessarily a sign that large swaths of the next generation will have to settle for something less, said RL Brown, a local market analyst who publishes the Phoenix Housing Market Letter. Homeownership rates reached a historic high in 2004 at 69.2 percent, which Brown said was boosted by government policies and banks eager to loan money. That dropped to 66.4 percent at the end of March.
“In hindsight, we should now begin to recognize that was an unrealistic number of the percentage of the population to own homes. That was a social exercise,” Brown said. “Homeownership requires stability and a whole bunch of other things like the ability to budget and it may well be that more than 30 percent of people in our nation don’t have those attributes and therefore shouldn’t own a home.”
Homeownership rates will probably fall to 62 percent to 64 percent by the end of the decade, said John McIwian, a senior resident fellow at the Urban Land Institute.
“Having said that, I encourage people not to be too upset about that because that is the range that homeownership fluctuated at between the middle ’60s and to the early ’90s,” he said. “Clearly, it’s a healthy range.”
Ownership rates could be hurt by new regulations and more conservative loan policies. Making matters worse, people who lost their home in foreclosure traditionally have a black mark on their record for seven years.
A big, permanent shift in ownership rates will likely be temporary, said Jay Butler, associate professor of real estate at the W.P. Carey School of Business at Arizona State University. Various problems in the economy have triggered at least four predictions since the 1960s that home ownership would be out of reach to the next generation, but Butler said no major shifts resulted.
“I’ve seen this before. It doesn’t mean it may not happen this time,” he said. “Fundamentally, Americans like owning their homes. It’s been ingrained with them.”
Butler said he wouldn’t be surprised if banks relaxed that practice because they don’t want to automatically block so many people from the market.
For people who can afford a home, the years-long decline in prices scares potential buyers. Until foreclosures reach normal levels and prices slowly increase to indicate a normal market, renting has many advantages, Brown said. Faith will have to be restored in the market, in banks and in regulators to make buyers comfortable.
“I don’t think we have it now,” he said. “I think everybody is as leery as they can be.”
It will take time to work out the financial, regulatory and social issues resulting from the crash, he said. And foreclosures will have to get down to less than 5 percent of transactions, down from about 30 percent now. He acknowledges predictions vary on when that will happen.
“A lot of people say 2014 or 2015, things will look normal,” Butler said. “Not great but normal.”
Americans will continue to want to own homes because so many grew up in a house and want that same lifestyle for their families, said Jim Sexton, a broker at John Hall and Associates. Yet those looking today will find a smaller supply than usual — and at times frustration as they find themselves competing against multiple bidders and investors.
“If you drill down into what’s actually happening in the marketplace, I think most buyers would be surprised at the volume of buyers,” Sexton said.
The excesses of the real estate bubble are changing attitudes about ownership, McIlwain said. Homes that are selling now tend to be more energy efficient, and high gas prices are making urban development more attractive. Homebuyers are less interested in the massive houses built during the boom, he said.
“There are cultural implications. People being more conservative financially, young people — hopefully this is true — thinking more in terms of the quality of life rather than the quantity of life,” McIlwain said.
Other lifestyle and demographic shifts could slow the housing recovery or at least impact which segments come back stronger. Aging baby boomers are more likely to want an urban lifestyle with amenities nearby. And snowbirds who once bought in the sun belt have found they’re too far from their family and now want to live by their grandchildren, McIlwain said.
“I think over the next 20 years you may see the Phoenix economy go through a significant restructuring and the housing market being spotty,” he said.
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