What Will It Take for People to Love Their Homes?

One of the lingering questions facing the economy as a whole, and Destin in particular, is whether the housing market has bottomed and whether prices may soon begin to rise.  My standard answer lately is that home prices will continue to fall further.  So, what will it take for prices to stabilize?  I am reminded of the title of Stephen Stills’ song from the 1970s, “Love the One You’re With.”  That is, we need for everyone who owns a house to love the house that they own and for those who don’t love the house they own to sell it to someone who will.  Until this occurs, prices will continue to fall slowly and painfully.

People who can’t afford their homes because they have lost their jobs don’t love owning their houses; neither do investors who bought homes expecting to ‘flip’ them for a profit—nor do the banks that have foreclosed on those owners.  The same goes for people who were given loans that they couldn’t reasonably be expected to repay.  What we need is a mechanism that allows the ownership of these houses that are owned by people who don’t love them to change to someone who wants to own them.

The mechanism that will allow this to happen is for prices to fall to the point that buyers can find and afford houses that they can love.  Stock market traders call this process where prices hit bottom and begin recovery ‘capitulation.’  It occurs when owners who were hoping to outlast the downturn throw up their hands and say “I give up!  Sell it for whatever someone will pay.”  When large numbers of sellers do this, prices drop far enough that potential buyers find prices attractive and begin buying in numbers large enough that prices stop their fall and begin to rise.

I lived in Texas when the closings of hundreds of Savings and Loan Associations forced banks and government to put the glut of houses up for sale.  It was ugly.  On many streets, there were three or four houses for sale on each block.  With so many houses suddenly available for sale, prices fell rapidly and government agencies like the FSLIC (the S&L version of the FDIC) suffered significant losses.  The market, however, did what markets do best.  Bargain hunters willing to take large risks snapped up the best deals first; then those looking for slightly safer investments stepped in and confidence that prices had gone as low as they could began to rise.  As more buyers entered the market and demand increased, prices continued to rise.

My friends in neighboring states sometimes ask what the prices of beachfront property in Destin are doing.  When I tell them that many properties are selling for 40% to 60% less than they were six years ago, they wince at they significant losses that investors and families must have suffered.  Then, they often say “If you see prices fall by another 10%, let me know.  I’m definitely interested.”  Buyer desire exists; but broad confidence that prices have stabilized does not.  The market for condos in Destin, like the market for homes in general follows a similar process.

Obviously, this is a painful process for sellers.  It is especially painful because the commodity being traded is peoples’ homes.  It is, however, a process our housing markets need to complete; the sooner, the better.  Policies that seek to ‘keep people in their homes’ only delay the pain that must occur for housing markets to rebound and for people to love the houses they own.

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