The Seeds of Recovery May Lie in the Rubble of Destruction

Posted by Jim DeBellis on June 22nd, 2011

The troubles with the housing market are really the solution to the problem. Basic economics will tell you that supply and demand have to come into balance in order to have a healthy marketplace, and right now we have too much supply and too little demand. The correction in home prices and a big slowdown in new building are really just the medicine that the doctor ordered.

Lower prices make housing more affordable, and in fact, according to the National Association of Realtors, affordability has increased by leaps and bounds since the buying craze ended in 2006. A family earning the median income of $62,000 pays only 13.5 percent of its income for a median priced home costing $163,000. Compare that to a slightly higher median income when the average home was priced at about $220,000, and you can see that it’s not a bad situation.

Now, factor in the fact that rents are rising dramatically along with the tax advantages of home ownership, and demand should be on the rise. The dismally few starts for builders – down by two-thirds since things went sour – will keep the supply limited as well.

Sure, there are other factors, like mounting foreclosures and aging Baby Boomers that might leave a lot of vacancies. But, the main thing holding buyers back is a lack of urgency – prices are still falling and interest rates are remaining low, so why buy now? Well, if the feds (and the Fed) mind their own business and let the market heal itself, then we should see Treasuries rising soon with the end of QE2, and interest rates could jump a couple of points in a year or two.

That will motivate the people who realize that rising interest can cost them more than falling prices will save them, especially when they compare the high cost of renting. As more people get into the market, that demand will stabilize prices, the economy will improve, and things might – just might – get back to something that we could be able to call “normal.” Maybe.