Sunday, September 12, 2010


On Wednesday, a story in the New York Times asked an interesting question:  Is housing a luxury or a staple?

The answer, whichever it is, will have a pronounced effect on if, when and how the housing market will see a recovery.

In the article, author David Leonhardt studied price fluctuations among luxury items (like boats, Mercedes and gold watches) and compared them to "staples" (like food and clothing) over the past 100 years.  His findings:  the prices of luxury items tend to rise and fall with great volatility, closely tied to increases in personal income.  Staples, on the other hand, tend to track the inflation rate, with less fluctation and less drama. 

From 1995 to 2005, according to the author, low unemployment and the availability of free and easy credit turned houses from staples to luxuries, and people began collecting homes like pieces of jewelry.  As the very nature of homes and home ownership turned from staple to luxury, prices rose accordingly, and millions of Americans who bought homes between 2000 and 2005 ended up paying luxury prices.

Five years later, most would agree that the prevailing psychology among home buyers has turned 180 degrees.  Underbuying is in, overbuying is out.  Conservation is in, excess is out.  Cash on hand is good, debt is bad.  This most definitely impacts prices.

We have always known that people make decisions based on how they feel, and if today's buyers feel that homes are merely staples, places to go to store your things and keep the cold out, then prices will be very slow to recover. 

A larger recovery in values will only happen when personal income rises, accompanied by the corresponding feeling of goodwill which comes with prosperity, which cannot happen when the unemployment rate is tracking above 10%. 

In short, the rules of homeownership have changed because the way we feel about housing has changed.  If you paid a luxury price during the boom years for something that has been redefined as a commodity (which I certainly can see firsthand in my own neighborhood), the premium you paid is gone.

In short, people gladly overpaid when they felt times were good.  Now, in a different economy, buyers stubbornly seek value above all else. 

Buyers and sellers have big choices to make in today's economy about whether buying or selling a home is the right move for them.  Everyone's situation is different, but it is important to understand how the rules of the game have changed and how people's perceptions from a few years ago have little connection to today's market.

In the big picture, there are reasons why buying a home today makes sense.  Interest rates are absurdly low,  builders are bringing next to nothing online, the populations continues to grow and we almost certainly will see better economic times ahead.  But as long as people feel uncertain, uncertainty will prevail in our market. 

The key takeaway from this article is that psychology affects prices, and the psychology that caused people to willingly pay retail for anything a few years ago has changed.  But just as things have changed in the past, surely they will change again.  And both home buyers and sellers should keep in mind that five years from now, we'll be talking about a whole new set of changes.