Roughly four decades ago, the 1972 Lincoln was considered to be the epitome of good taste and a symbol of success. Two years later, these oversized uneconomical consumer durables were heading for the crusher. Maybe housing was a similar status-symbol at the bubble peak, and now is transforming from golden goose to ball and chain.
It may be worthwhile to separate the effects of helping keep distressed mortgage holders in their homes from the ability of the Fed, the governmentsponsored enterprises’ or Congress to stimulate new buying of an asset that is already over-owned — the homeownership rate has still not completed its meanreversion process.
Affordability is indeed important, but the expectation that home prices will increase or decrease plays a large role in deciding whether to rent or to buy. No matter how affordable an asset is, a rational investor would never acquire it unless he/she expected the price to increase. Of course, there are always people relocating, and so this type of frictional activity doesn’t go away, even in a recession. But discretionary buyers will not choose to lose money, if they are rational.
Recall that home sales were surging in 2004, 2005 and 2006 even as affordability ratios deteriorated because of accelerating price and capital gains expectations. So home prices, which historically went up one percentage point faster than inflation, managed to surge at an annual rate of 10 percentage points above inflation from 2000 to 2006. Therefore it is quite difficult to believe that the mean-reversion phase will stop anytime soon, given the parabolic nature of the last decade and how long it managed to last. Remember Bob Farrell’s Rule #1 on mean reversion: you don’t stop at the mean; you go right through it (and in both directions).
---yesterday (my italis) Whoops - actually 9.13
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