RETHINKING MARKET FUNDAMENTALS

The demographic and economic beliefs that have driven the housing demand for the past decade have now come into serious question:
• The demographics-as-destiny argument. The expanding U.S. population -- immigration -- would fuel real estate demand well into the next decade.
• Low mortgage rates. Cheap credit would keep home loans affordable.
• Boomer wealth. Prosperity and the rolling over of assets from the Depression generation to the spending generation would continue to ignite home purchases.
• Low unemployment. Gainfully employed people buy houses.
• Unlimited market liquidity. Access to capital was unrestrained as Fannie, Freddie and the mortgage-backed securities market were flush with funds.
While Michigan has been plagued with high unemployment for the past seven years, thus eliminating one of the key fundamentals listed above, the rest of the country has prospered under these dynamics until more recently.
As the national housing bubble began to burst in 2006 and 2007, it has become clear that underlying market drivers listed above were not sustainable on a national basis. Demographic demand is changing. Mortgage rates remain low but so is liquidity. Frivolous lending practices are a thing of the past. Boomer wealth has been diminished.
Demand for housing now depends on more basic considerations. This represents a return to an old set of fundamentals. Homeownership offers more control and freedom compared to renting. The government subsidizes homeowners, not tenants. And over the long term, owning a home is a disciplined way to build savings as owners pay off their loans and keep their housing costs predictable, assuming they get traditional fixed-rate mortgages.
Homeownership has become much more affordable because wild swings in value even out as easy money is not pushing too many buyers into the market. Home ownership is favored over renting, but it will not be as easy as it has been for everyone to buy. Home ownership will again be a desired goal that all may not be able to achieve.