Creative Class

The Case-Shiller Home Price Index projects slow growth in house prices for the next four years or so. The chart below (via The Wall Street Journal) tracks the Case-Shiller Index from 2000 through 2014.

After a slight uptick, the index is projected to decline again by about 1.4 percent this year. The cumulative increase for the next five years is projected to be 10.5 percent – or about 2 percent a year. This will make up about a third of the total loss (28 percent) from peak housing values in 2006.

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Is America’s system of homeownership just a mirage?

That’s the question Wall Street Journal economics editor David Wessel asks. The graph below compares the the peak homeownership rate, the current rate, and the percent of homeowners with positive equity for 10 of the largest U.S. metro regions. Less than half of homeowners have positive equity in their homes in eight of 10 of these metros: In Las Vegas, the figure is less than 20 percent.

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A former mortgage professional writes:

I spent 10 years in the mortgage business… and I still cannot figure out why the interest on second mortgages and lines of credit is tax deductible? I used to see people buy boats and Corvettes with their lines of credit and it frosted me that all of us tax payers were subsidizing the interest. This area must be addressed. I think that a tax deduction for the interest paid on a mortgage should be limited to the primary mortgage only.

Commenting on this earlier post, Jack Burns writes:

Renting is a service I gladly pay for. We spend about $40 a day for use of a nice three bedroom townhouse on a quiet street, with a private yard, a larger park for kids in the complex and a city park 5 houses away. The AGO is at the end of the street. Walk to work, got rid of the car and no equity buried in concrete, dirt and drywall. I like my equity earning interest and dividends and accessible when I need it. I also like having money set aside for a surprise like a weekend trip to Manhattan, or a night at the Opera instead of a blown water heater or a leaky roof. I know many homeowners and they like it. It enables you to be fixated on a world of a couple thousand square feet knowing you need not think beyond that world. It’s very comforting, like being a religious fundamentalist.

Market forces are already causing a significant reset in America’s housing system – and a lot quicker than most people imagine.

Earlier this week, I argued that America’s penchant for homeownership distorted the economy, and that it makes good economic sense to tilt the balance of homeownership back from its high point of 70 percent to roughly 55 or 60 percent – about the level found in the most innovative, affluent, and highly skilled regions. The Urban Land Institute projections (PDF) already predict the homeownership level will fall back to 62-64 percent as a result of the downturn, tighter credit conditions, and demographic shifts.

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Want an example of how to shift from ownership to rental? Here it is via the Wall Street Journal. It’s a doozie. And it’s a model of what the federal government – instead of propping up the mortgage and home-ownership markets – can and should do more of. The Miami Development Community Corp. is buying up “busted” condo developments and turning them into affordable rentals.

The public-housing agency recently paid $5.7 million for the 35-unit Neptune Beach, one of the many failed condo conversions remaining from the housing boom, in prime South Beach … The Mediterranean-style building, which boasts high-end porcelain floor tiles and Italian kitchen cabinets, will be used as affordable rental housing for employees of nearby stores and restaurants, says Roberto Datorre, the development agency’s president. Renters will pay from $550 to $650 a month. The agency already has snapped up a 16-unit failed condo conversion in North Beach for a little more than $1 million out of foreclosure. Another purchase is in the works. The city of Miami Beach and the state of Florida helped make the deals possible.

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My Wall Street Journal column today asked: “Is Homeownership Overrated?“ And NPR’s Planet Money’s Question of the Day asks: “Is Owning a Home Overrated?”

The rate of homeownership in America is already starting to fall back on its own. From a high of almost 70% during the bubble years, homeownership has fallen to roughly 67%; slightly less than 39% of Americans between ages 18 and 35 own their own home, down from 43% in 2005. The Urban Land Institute projects that homeownership may fall to 62% over the next decade or two.

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More evidence of the ongoing housing reset (from The L.A. Times via Planetizen):

Timm Freeman’s Santa Monica apartment has 17-foot ceilings, granite countertops and collector guitars hanging on the wall. He’s got a built-in microwave, dishwasher and central air conditioning. All in 350 square feet. Freeman’s coffee table is also his dining table. His desk is three steps from his sitting room …

Freeman’s apartment may be smaller than many suburban master bedrooms, but rents in his Olympic Studios complex are comparatively small too: $1,110 a month at the low end, and the beach is just a mile away.

Prospective tenants need to sign up for a waiting list: The 165-unit Olympic Studios has been filled since it opened in late 2008. The developers are now building a similar complex nearby, and a pint-sized apartment project is also planned for the Palms neighborhood of West Los Angeles.

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Housing prices continue to reflect the geographic reordering of The Great Reset. The newly released Case-Shiller Home Price Index shows a very uneven housing market, with significant recovery in some places and continued decline in others. While the National Index is up 2 percent over the first quarter a year earlier, it is down 3.2 percent from the end of 2009. The map below, created by Zara Matheson of the MPI, shows the year-over-year change in home prices for the 20 metro areas covered by the Index.

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The big news last week on the housing price front was the jump in the S&P/Case-Shiller Home Price Indices. Even though the bounce was rather slight – the widely cited index registered a year-over-year increase of just 0.6 percent – the media glommed on to it as evidence that the housing market might be stabilizing.

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