Speculators Return to Housing Market
A handful of recent articles on the housing market caught my eye because they all shared a common thread: the return of speculators – or rather, the return of a speculative mindset – to the housing market. This phenomenon was pervasive during the expansion of the housing bubble, but it seemed to have vanished as soon as the bubble burst. Now, it has returned big-time and appears to have once again taken root among ordinary homebuyers.
It could be argued that this is a welcome sign of recovery in the housing market. After all, given that a foreclosure crisis appears to be raging, shouldn’t we be happy about the bidding wars that have broken out over recently foreclosed properties? Along similar lines, isn’t the return of investors a manifestation of optimism towards housing prices and hence, a positive development?
Alas, the re-emergence of speculation is also associated with less benign developments. In Las Vegas, where home prices are down 60% from their peak, and tens of thousands of homes sit empty, investors are licking their lips. ” ‘The chance to make money on the next housing boom “is like it’s never been,’ said…a real estate promoter. ‘We’re going to come back like you’ve never seen us before..’ ” Meanwhile, “Analysts have calculated that it could take as long as a decade for inventories to return to their precrash levels and for demand to once again exceed supply.” The concern, then, is both that a new bubble could be ignited and that such a bubble would quickly explode, bankrupting and necessitating bailouts for another batch of homeowners.
Meanwhile, personal finance columnists have taken to advising their readers on trying to time the market when buying/selling a home: “There just doesn’t seem to be any upside to your listing your home now. You’ll be better off if you use the time before your husband’s retirement for de-cluttering, landscaping and prettying-up your home so that it draws top dollar next spring,” suggested a columnist for the Wall Street Journal. There’s nothing wrong with being optimistic, but it worries me that homeowners are getting caught up in the same mindset which produced this crisis, and setting themselves up for disappointment, in the process.
A blogger for TIME magazine astutely pointed out that this mentality can be toxic: “The development of a market-timing mindset in housing is worrisome. That’s because it’s not clear to me at what point metrics like price-to-rent ratios go from being tools used by homebuyers to stand-alone reasons people decide to buy.” Given the large sums of money involved, it’s understandable that financial considerations are also going to preponderate in the mind of the buyer. However, the decision to buy/sell a home should be made from the standpoint of utility, and based on the specific circumstances of the borrower.
Homeowners ultimately need to recognize that over the long-term, home prices will appreciate nearly at the rate of inflation, with any discrepancy explicable from changes in supply and demand. Thus, if the investment/speculation motive continues to carry weight, then another boom/bust will be self-fulfilling.