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"People are simply scared," and they shouldn't be…."

If you don’t read this whole post, at least look at the pictures. The Wall Street Journal had a great article last Sunday and I think it is good to see positive articles; such as this one, with facts and trends that back it up.


Back in June 2006, when the housing market peaked, the prospect of a
five-year national housing bust seemed unimaginable to most people. And yet here
we are, with the latest Standard & Poor’s Case-Shiller index showing that
prices hit new bear-market lows, falling back to 2002 levels nationally and to
1990s levels in some battered regions.

April Home Prices

See the change in home prices from April 2010 to April 2011, state by

Home Prices, by Metro Area

See data from the 20 metro areas Case-Shiller tracks.

Despite all the gloom, however, there are growing indications that it is a
good time to buy. Mortgage rates, which fell to 4.55% for the week ending June
2, according to Freddie Mac, are near 50-year lows. Homes have become more
affordable than they have been in years: According to Moody’s Analytics, the
ratio of home prices to income is now 20.9% lower than the 15-year average
through 2010, and 12.5% lower than the 1989-2004 average. A historic glut of
homes, meanwhile, has created a buyer’s market: There were about 15 million
vacant homes in the U.S. last year, according to John Burns Real Estate
ConsultingInc.—some 3.1 million more than normal.

Such conditions might not last long. Moody’s Analytics predicts that the
number of distressed sales will begin to fall in 2013, and that prices will
begin to edge upward then. Home building is at a virtual standstill, so the
supply overhang isn’t likely to get much worse. Meanwhile, demographic
indicators such as “household formation”—the number of new households each
year—are on the rise, and promise to take a bite out of the glut in coming

LendingAs rates hover near historic lows, experts expect banks to ease borrowing
standards over time.


Greenwich, Conn.




If prices stabilize, it could tip the balance away from fear and pull more
buyers back into the market.


In several markets, it’s becoming cheaper to own than to rent:

ASSOCIATED PRESSCleveland Heights, Ohio



The rate of “household formation” is expected to climb in coming years.


ReutersProvidence, R.I.



The strength of the housing recovery depends on job growth.


Associated PressDallas


The upshot: “While we might not see rapid growth in the next couple of years,
there are a tremendous number of positive signs that could lead to a rebound,”
says Anthony Sanders, a real-estate finance professor at George Mason

The short-term outlook isn’t encouraging. Job growth remains weak,
foreclosure sales are making up more of the market, and economists are
predicting that home prices will fall more in the coming months.

But the long-term benefits of homeownership remain very much intact. For now,
at least, you can deduct the mortgage interest on your taxes—a big perk for
people in higher tax brackets. You get to paint your walls any color you wish,
without having to clear it with a landlord. And assuming you can buy a home for
about the same price as you can rent one, buying will give you the ability one
day to live rent-free. Come retirement time, a paid-off mortgage means your
monthly expenses are significantly reduced, and you have a chunk of equity to
play with.

So what might the next five years look like? Once the foreclosure mess begins
to clear up, say housing economists, the traditional drivers of the housing
market—demographics, affordability, loan availability, employment and
psychology—should take over.

Here is a glimmer of what the future may hold: While overall home prices fell
by 7.5% in April over the same period a year earlier, according to CoreLogic, a
Santa Ana, Calif., provider of real-estate data and analytics, if you exclude
distressed sales, prices were off just 0.5%. So if you are in a market that
isn’t battered by foreclosures, you may be close to a bottom already.

“The regular marketplace is hanging tough,” says CoreLogic chief economist
Mark Fleming.

Here is a look at five key factors that will govern local markets over the
next several years:


Household formation fell during the economic downturn as a weak economy led
some people to stay in school, double up with roommates or move in with family
members. According to Moody’s Analytics, the number of new households renting or
owning a home dropped to 578,000 in 2008 from nearly 2 million in 2005, just
before the peak of the housing boom.

But household formation increased to nearly 950,000 last year, says Moody’s,
and should average 1.2 million over the next decade.

That, combined with increased obsolescence and higher demand for second
homes, should begin sopping up excess inventory in much of the country over the
next two years, Moody’s says.

“Whatever the excess supply of housing is, it is shrinking pretty fast,” says
Thomas Lawler, an independent housing economist.

Some of the uptick in household formation is likely to come from the leading
edge of the echo baby boomers, who have been waiting for the economy to recover
before striking out on their own, says William Frey, a demographer with the
Brookings Institution. That is likely to fuel an increase in demand for both
rental apartments and starter homes.

The portion of people moving across the country has fallen to the lowest
level since World War II, he adds. That is a sign that many people have put
their lives on hold because of the weak economy.

“When things do pick up, there will be this pent-up demand for everything
involved with starting a household,” Mr. Frey says.

Of course, when prices in healthier regions begin to rise, many would-be
sellers who have sat on the sidelines could begin putting homes on the market,
muting the price gains at first, says Susan Wachter, a professor of real estate
and finance at the University of Pennsylvania’s Wharton School. Even so, she
expects home prices to stabilize and begin to strengthen over the next two or
three years.


There also are some powerful demographic cross-currents worth considering.
The first baby boomers turned 65 in January, an age when demand for new homes
falls and many begin to think about downsizing. “The baby-boom generation pushed
prices up as they got older,” says Dowell Myers, a professor of urban planning
and demography at the University of Southern California. But in the coming
years, “boomers will start flooding the market on the supply side” with larger
homes, while fueling new demand for smaller properties with more services and


Rising home prices made renting cheaper than buying in many parts of the
country. But that dynamic has begun to change: Housing affordability, as
measured by the ratio of median home prices to median household incomes, has
fallen below pre-housing bubble levels in just over two-thirds of the country,
according to an analysis of more than 380 metro areas by Moody’s Analytics.

Renting is still cheaper than buying in most markets, but rising rents and
falling house prices mean that, in some areas, this won’t be the case for long.
Buying a home is already cheaper than renting in Chicago, Cleveland, Detroit and
Orlando, Fla., according to Moody’s Analytics. In other markets, including
Dallas, Las Vegas and Sacramento, Cailf., the equation is likely to soon turn in
favor of homeownership if current trends persist, the firm says.

In Ann Arbor, Mich., where home prices fell 11.2% between 2007 and 2010,
according to Fiserv Case-Shiller, housing affordability has risen well above
historical levels, according to Moody’s Analytics.

That is good news for home buyers such as Steven Upton, a 42-year-old
photographer, who in June will close on four-bedroom brick house on 10 acres in
an upscale community in Ann Arbor. Mr. Upton paid $400,000 for the home, which
previously listed for $600,000. “It’s a tremendous deal,” he says.

Before buying a house, it is wise to compare rental prices for similar
properties. To be ultraconservative, wait until the monthly outlays, including
taxes and insurance, are equal. You also could factor in the tax savings of
owning, which would make buying more attractive even if the gross monthly outlay
is slightly higher.


The strength of the housing market depends largely on the economy. Rising
incomes and increased employment tend to give more would-be buyers confidence
and buying power. For now, job growth remains sluggish: On Friday the Labor
Department reported that just 54,000 jobs were created in May, far below

But signs of how a stronger job market could fuel housing demand are evident
in the Dallas metro area, which added 83,100 new jobs in the 12 months ending in
April—the largest gain in the nation, according to the Bureau of Labor
Statistics. Dallas never had a big housing boom or bust and has benefited from
trade with Mexico, a strong telecommunications sector and a central location.



The opportunities for a job with more responsibility drew Duane and Linda
Elmer to Dallas from Des Moines, Iowa, where Mr. Elmer was a banker for nine
years. The couple has agreed to pay $415,000 for a four-bedroom, four-bath house
with a Jacuzzi and pool. Their Des Moines home, purchased nine years ago for
$410,000, is on the market for $390,000. “We are willing to take the loss for
the opportunity to live in a more diverse community and to take a job with
greater breadth of responsibilities,” Mr. Elmer says.

Borrowers like the Elmers who are relocating for job opportunities are a big
driver of home sales in nearby Plano, Texas, says Harry Ridge, a real-estate
agent. He says such sales accounted for 20% of his business last year.

A similar influx of job seekers is fueling housing demand in the Washington
area, where 25,700 new jobs were added in the 12 months since April 2010.
Washington was the only one of the 20 cities tracked by Standard & Poor’s
and Case-Shiller that saw home prices rise both on a month-to-month and
year-over-year basis.


Mortgage financing remains plentiful for borrowers with good credit scores
and solid employment histories. But for borrowers who don’t fit traditional
lending standards, getting a loan can still be nearly impossible. In the first
quarter, about 10% of banks tightened standards for nontraditional loans,
according to the Federal Reserve. Meanwhile, higher down-payment standards are
locking some would-be buyers out of the market. Just 35% of renters have the
minimum 3.5% down payment needed for an FHA loan on the median-priced home in
their market, according to a recent survey by Zelman Associates.

Credit is likely to remain tight for at least the next six months, says
Clifford Rossi, a former Citigroup Inc.
consumer-lending executive who teaches at the University of Maryland.

But conditions should improve over time, he says: “There’s no question that
it will gradually get easier.”

That will be welcome news to borrowers like Greg Silver. The 50-year-old
real-estate developer would like to buy a second home, but hasn’t been able to
secure a jumbo mortgage because his income consists of capital gains from sales
of the properties he develops. Mr. Silver closed three sales in the past 12
months, netting him a total of more than $25 million, but didn’t record any
capital gains in 2008 and 2009. Sure, he could use some of that cash to buy a
home outright, but he would prefer to mortgage it, get the tax deduction and
keep his cash free for business purposes.

“It’s a little devastating,” says Mr. Silver, who is living in Greenwich,


The long-term case for buying over renting remains in force. Yet nowadays,
“People are simply scared,” says Aaron Galvin, chief executive of Luxury Living
Chicago, which finds rental apartments for wealthy clients.

Mr. Galvin says he has seen a 30% increase in business in the last year,
driven by would-be home buyers who can afford to purchase a property but are
choosing not to do so.

The portion of Americans who believe homeownership is a safe investment
dropped to 66% in the first quarter from 83% in 2006, according to Fannie Mae,
the government-controlled mortgage company.

But it isn’t clear whether the fear will result in a prolonged change in
attitudes, as during the Great Depression, or have little long-term impact, as
was the case for the housing bust that shook California and the Northeast in the
late 1980s and early 1990s. Eighty-seven percent of people surveyed by Fannie
Mae said they preferred owning to renting, though access to schools, control
over one’s environment and other quality-of-life issues now are seen as the key
benefits of homeownership, with building wealth and other financial factors
viewed as less important. In addition, 67% of renters surveyed by Zelman
Associates said they planned to buy a home in the next five years.

Jeffrey Connor may be a bellwether for the future of the housing market. The
40-year-old finance director at a corporate law firm says he thought briefly
about buying a house when he moved to Chicago from Washington in October. But he
opted instead to rent a luxury two-story apartment in downtown Chicago for
$3,559 a month. Mr. Connor says it will take substantial job growth and a sharp
drop in foreclosures to convince him to buy.

“The market is clearly soft,” he says, “especially when we consider it good
news that the unemployment rate is hovering around 9% instead of 10%.” Mr.
Connor says he isn’t worried about missing out on today’s low interest rates and
will consider buying once unemployment falls to 6%.

Other buyers are showing less willingness to wait for the absolute perfect
time to buy. Doug C. Yearley Jr., chief executive of luxury builder Toll Brothers Inc.,
told investors in May that “some of our clients, after waiting so long, are
starting to move off the fence and into the market, motivated by attractive
pricing, low interest rates and, most important, the desire to take the next
step in their lives. The family with elementary-school kids and a puppy when the
housing debacle began five years ago now has middle-school kids and the dog
weighs 80 pounds.”

Write to Ruth Simon at and Jessica
Silver-Greenberg at

Corrections & Amplifications
Douglas C. Yearley Jr.
is the chief executive of luxury builder Toll Brothers Inc. His last name was
misspelled as Yearly in a previous version of this story.

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