I’m going to assume that Jack Welch is smarter than I am. This is not an easy admission to make. It’s this assumption of superior intelligence that left me bothered after hearing him spouting on and on about a massive housing recovery coming to a town near you in 2012. Jack argued his point based on diminishing supplies and improved employment statistics, and these, in themselves, are nice little points. If those two factors existed in a vacuum, Jack would be onto something. Unfortunately, there are other factors at work that will cause the housing market to remain stuck during 2012, and perhaps the most powerful negative force on the market will not be something tangible, it will be psychological.
On a National, perhaps global level, housing has lost much of its luster. In the minds of many, the crown jewel of achievement is now viewed not as a precious stone but a weighty boulder. This jewel has become a noose around so many necks, and housing, both in application and in perception, has changed. As a society we no longer view housing as a stable place that will hold its value and routinely outpace our other paper investments. No matter that some markets, like Lake Geneva, have remained remarkably stable throughout this recent tumult, the perception is the same. Real estate is less a safe haven and more a risky venture. Gains or losses will mount, but a perception of stability, built on the backs of generations of returns, has vanished.
Jack is looking to the facts, and those facts will likely lead some sort of housing renaissance this year, but they will not lead a blowout recovery. If the jobless rate drops, this is obviously a positive for business and in turn, for housing. But is it really? If you’ve been out of work for a year, living on reserves or the kindness of taxpayers, and you finally secure a job, what then? Report to work on a Monday, lunch with the boss on Tuesday, home shopping on Wednesday, move into the new house 30 days later? Doubtful. Instead, those long term unemployed are going to be gun shy to the point of paralysis. If income has been absent for a long while and it finally shows itself, will someone immediately set about entering into a long term indebted relationship with a bank that they don’t trust to secure a home that they don’t trust in a job environment that will be tenuous at best?
An improvement in the jobless rate will be tremendous, but spark an immediate housing revival it will not. If inventory dries up, as it has been, what exactly does that mean? Does that mean people are content in their homes and they wish to stay put long term? Or does it simply mean that most long term sellers have given up their hopes of selling and are, in effect, resigned to their own deeded fate? The answer unfortunately is the latter, and any resurgence in home sales will likely lead to increased inventory as sellers take note of a slightly improved housing environment and attempt to sell what they’ve long wanted to sell. This inventory build will have a negative impact as the amount of sellers returning to the market will far outweigh the number of buyers doing the same.
By some estimates, there have been more than four million foreclosures in the US since the beginning of 2006. The market tends to look at the inventory of REO properties generated by that exodus of owners, but more detrimental to the future health of the market are those four million ex-property owners. Without knowing the statistics, we can still consider the impact of four to eight million citizens who had previously been pro-housing. This large chunk of our population will be forced to sit on the sidelines for several years as they repair their credit and lick their emotional and societal wounds. These foreclosed on individuals were not housing pessimists- they were optimists- and now many will view housing as the instrument that destroyed their finances if not their lives. Is this a demographic who will lead a housing recovery? No. It is instead a group who will be long term tenants, either through choice or necessity, and they will trickle back to home ownership much more slowly than pundits like Jack might believe.
The last group who is lagging and who just may find a way to miss out on the most profound housing opportunities in decades is whatever they’ve labeled this current generation. I think I’m Generation X, but the Baby Boomers are the only ones who got a cool name tag and left all other labels unmemorable. Whatever their name, the current generation of mid-twenty somethings are poised to miss out on an unprecedented opportunity to pursue value and establish equity much more quickly than any recent generation. The problem here is that this generation suffers from not only a trimmed down job market but also a heavy dose of skepticism. Many view housing as the vehicle that broke their parents or their aunts and uncles, and they’ll be damned if they’re going to fall for the same “tricks” that their parents fell for. This distrust of the market will be a benefit to some who might lack the intelligence to pursue actual value, but for others, this hesitation will be a curse that will lead to a severe equity gap for this generation- an equity gap that will be of their own choosing.
There is light at the end of this tunnel, but this should serve to temper some of the robust numbers that pundits like Jack Welch and economists like Larry Yun are spewing. The markets will improve in 2012, there is little doubt. A change in administration this fall could signal the start of a relative bull market for 2013, but 2012 will be a year that will look much like 2011. Housing will improve, ever be it so slowly. Case Schiller will tell us that certain markets have improved and others have declined further, but these movements will be measured in single, barely readable percentage points. The large swings of volatility should be over, and a slow return to stability will be inevitable. The real obstacle to a real estate blowout isn’t unemployment or interest rates or inventory, it’s the American psyche. Are we ready to trust housing again? Probably not. Yet.
(Disclosure time- Geopolitical events that might roil stock indexes during certain points of 2012 will obviously put a damper on improvements in the housing market.)