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What a bottom in housing means for affordability

by Ethan Handelman, National Housing Conference

This week saw the Wall Street Journal declare that “housing is bottoming…the numbers are convincing.” The New York Times described a predicted improvement in the overall economy, based in part on housing forecasts, as “a firming up, if not quite a comeback.” Both were citing expert analysis and their own observations of aggregate national indicators like indexes of housing prices, totals of the existing inventory of homes for sale, construction starts, and recent transactions.

A bottoming out of housing markets and the concomitant return to rising prices, easier buying and selling of homes, and more construction would certainly be a good thing. There are a few caveats to keep in mind when reading such predictions:

  • Predictions of market bottoms can be self-fulfilling, so some have an interest in making them regardless of the data. Markets bottom out when we collectively agree that they have—expectations that prices will rise cause people to buy. So, those who want the market to improve will look assiduously for signs of improvement to highlight. Of course, that also means we’re more likely to dismiss such predictions. 
  • There is no national housing market. Real estate is inherently local. For most people, a home in New York City doesn’t trade against a home in Missouri, and prices reflect that. So national-level statistics have limited meaning. Some markets like the Twin Cities may have already found bottom. Others, like Atlanta or Detroit, may have many more years of decline ahead of them. Nick Timiraos had an excellent piece to this effect in the Wall Street Journal last month.

If you’re concerned about housing affordability, however, the market bottom won’t cure all ills.

Up-trending markets will see more construction and likely more robust home sales markets, as more sellers are willing to offer their homes and buyers are willing to invest. But they’ll also see rising rents and home prices, quite likely rising faster than incomes.. (The Center for Housing Policy released an update to their Paycheck to Paycheck database yesterday, addressing the growing issue of the gap between wages and housing costs.) So the affordability problems, from working families down to the poorest of the poor, will get worse. That’s especially true in places where local zoning and land use policy make it harder to create new housing when demand rises or that don’t preserve affordability along with new development.

Down-trending markets will remain in the vicious cycle of foreclosure, lack of demand, neighborhood disinvestment, and asset deterioration. Unless smart public interventions interrupt that cycle, it will be hard for the market to recover on its own. If incomes remain low because of limited economic activity in the area, depressed asset prices aren’t enough to make housing affordable (see the Center for Housing Policy’s discussion of the relative movements of housing costs and incomes in Housing Landscape 2012).

Even as we keep eyes peeled for a bottom in individual markets, we have to keep working on policies that help make housing affordable for the nearly 24% of working households paying more than half of their income toward housing. We need to stabilize neighborhoods in the face of widespread foreclosure, preserve and create affordable rental housing, ensure broad access to safe, affordable mortgages, and making inclusion of affordable a core part of local land use.

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