Pricing Ourselves Out of the Housing Market
In his Dec. 26 commentary, “Housing Still Hasn’t Hit the Ceiling,” Nicolas Retsinas notes that California created four jobs for every housing unit built in the 1990s but fails to explain why the market didn’t react by simply building more houses.
A typical exchange goes like this: Developer Jones announces plans to build 100 homes in an area at a unit cost of (fill in a reasonable price for your neighborhood). Local residents then protest the increased traffic, etc., that the new tract would bring (as if their own homes somehow didn’t contribute to this). Jones then goes back to the drawing board and produces plans to build only 50 homes at (fill in a much higher price here) on the same land.
The locals acquiesce and the homes are built. The losers in this exchange are young couples who can afford much less in the way of housing than their parents could.
Retsinas’ sanguine view of the health of real estate is, I hope, correct. However, several factors may derail his rosy scenario.
First, Retsinas cites as a positive for housing the very low down payments required today (5% or lower).
But this low down payment may be the modern analog to low stock margins in the 1920s. If prices started to decline, it could lead to a large rise in mortgage defaults, since homeowners would no longer have positive equity.
The increase in homes for sale would lead to further price declines, starting a downward price spiral.
Second, the massive fiscal contraction in California could hurt real estate sales. It could lead to higher taxes and job losses, depressing demand in the (once) Golden State.
A new fiscal stimulus package out of Washington, along with federal aid to the states, will help California and other hard-pressed states. But will it be too little and too late to rescue real estate and the overall economy from another recession?