This morning I was reading an article on CNN Money regarding the fact that home prices have fallen to 2002 levels, a 9-year low. While this information is not necessarily a surprise to me (someone who works very intently in legal and real estate doings), what was surprising was (1) the fact that home builders have turned more bullish and (2) that the goal and intent of most Americans, according to Fannie Mae, is to become homeowners.
I do not have a thorough understanding of home builders, developers and contractors’ balance sheets so I cannot comment on their decision to continue to build regardless of the status of the housing market. That said, I do have an understanding of the rehab market, the number of individuals on the unemployment line and the number of existing houses on the market that are in desperate need of updating and repairs.
Building more homes that have a very narrow pool of buyers is a much greater risk than improving existing homes by employing local contractors and expanding your prospects – there are more buyers who can afford to buy discounted retail properties and do the work on their own (or hire someone) to improve the property to their own specifications than can purchase a brand new, high-end retail McMansion that many of the builders are continuing to build to make up for their significant losses over the past 5 to 6 years.
So what happens when the market drops another 20% due to a flood of foreclosures expected to come onto the market over the next few years and these builders keep building – spending time, resources and money on creating a product that is losing potential customers? I am not a pessimist by nature but my logic tells me that they could very well be plotting their own demise. When inflation forces middle-class families into poverty and more jobs dry up than are created, we are going to have a serious problem when the number of people who can afford to own real property is a fraction of the amount of property in inventory.
Which brings me to #2 – the GOAL of most Americans is to become homeowners; it is not a guarantee but merely a dream. Unfortunately for most Americans, their current financial situation is in distress and the average credit score is fair at best. Rebuilding credit takes time. What happens to these Americans if the economy gets worse? What will happen to their dream of homeownership if they lose the ability to pay for their groceries, not to mention their rent?
One thing is certain – if the housing market is expected to worsen in coming years, it is likely the economy will follow suit. Create more jobs now. Develop a plan to assist Americans in purchasing their own home without requiring perfect credit history and offer flexibility in making payments to accommodate hard times.
Rather than plan on a best-case scenario and keep building and keep dreaming, it would be safer to plan for the worst.