By now, we have all realized that the rise in home mortgage defaults and the decline in home sales and prices are not just blips on the radar screen.
As I write this in the cold light of January, the business news is full of debates about whether we are entering a recession or not. Who cares what you call it? The economy is slowing substantially. More importantly, the housing market is undergoing a fundamental transition.
One economist told me recently that the basic preference for homeownership over renting has not changed. When the home sales market recovers, he said, landlords will struggle once again to keep tenants who would rather become homeowners.
I think my economist friend was partly correct. I think the desire for homeownership will reassert itself fairly soon.
But I don’t see a quick return to what author Daniel McGinn called “house lust” in a book of the same name. In recent years, families were stretching their finances every which way to buy bigger and bigger homes that are equal parts nest and nest egg. I don’t see a return to that level of intensity for a long while.
In 2006, some moderate-income families found it easier to qualify for a home loan than to lease an apartment. That won’t be the case again for a long time.
Instead, I think the desire for ownership will be satisfied by more modest homes, with loans underwritten the old-fashioned way. I think the condo business will come back stronger than ever, at least the part that aims to provide owner-occupants with decent affordable homes rather than appealing to investors and condo-flippers.
I also think tenants will be more receptive than ever to the economic arguments in favor of remaining in a rental apartment for a longer time.
The home lending debacle of 2007 and 2008 will have a long-term effect on buyer psychology, and landlords can’t be blamed for helping keep it in the public mind. A lot of aspiring homeowners paid a very high price for their folly, and it can and should serve as a warning for others.
That’s not to say rentals won’t struggle this year. The slowing economy will stifle rent growth and slow household formation, and may increase vacancies for some. It will be hard to project the increased income you need to make new acquisitions work.
Some developers I talk to are equally concerned about inflation, and the likelihood that it would lead to much higher interest rates.
At press time, I read the first reference to the risk of “stagflation.” It’s a great word, but it’s a horrible economic phenomenon that many of you are not old enough to remember from the ’70s.
In short, it could be a tough year. But the name of the game in 2008 will be to prepare for 2009. Watch your markets, look for good deals, and if you can lock up land to build on, do it.
Demand will be increasing for rentals in markets that are not in long-term economic decline. There will also be renewed demand for moderately priced condos and properties for conversion to condos. And for owners who know how to appeal to households who have the means to afford a modest home, more opportunities will exist than ever to persuade them to rent with great service, appealing amenities, and high-quality finishes.
For my money, the best bet is to provide a product that competes well with ownership and find ways to help tenants prepare for ownership while renting. I would also hedge my bets with a condo project or two.
What is your best idea for surviving 2008 and preparing for 2009? Write to me at email@example.com.