The National Housing Survey and the real estate bear market

By Felix Salmon
April 6, 2010
National Housing Survey; I'd recommend downloading the full 117-page presentation here. It confirms what I've been hearing anecdotally: that people still believe in housing as an investment, and that the enormous nationwide housing crash has done much less to alter Americans' attitude towards homeownership than we might have hoped.

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There’s a huge amount of information in Fannie Mae’s National Housing Survey; I’d recommend downloading the full 117-page presentation here. It confirms what I’ve been hearing anecdotally: that people still believe in housing as an investment, and that the enormous nationwide housing crash has done much less to alter Americans’ attitude towards homeownership than we might have hoped.

For instance, check out the huge majority of all segments of the population which believes that a high rate of homeownership is important to the economy; more than half of Americans believe it’s “very important”.


This is horribly misguided, and it’s particularly depressing that even 77% of renters share in the mass delusion. Homeownership is, if anything, a drag on the economy, since it funnels resources into unproductive overconsumption, and helps to impede labor mobility. There is absolutely no reason to believe that countries with high levels of homeownership, like the U.S., have better economies than those with low levels of homeownership, like Germany.

The survey just gets more depressing from there. Americans think now is a good time to buy a house, largely because they think it’s always a good time to buy a house. And they reckon — even now — that house prices are going up, or will at least stay stable.


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I think what we’re seeing here is a mindset utterly conditioned by the massive, decades-long bull market in housing. Never mind that that bull market has come to an end; the syllogism is simple. House prices always go up; housing is a bargain right now because prices have ticked downwards; therefore now must be a great time to buy.

I see this mindset in New Yorkers who genuinely believe that $1 million is not a lot of money to pay for a 2-bedroom apartment, even when it comes with thousands of dollars a month in maintenance costs on top of that. Of course they never would have believed such a thing 10 years ago, but the anchoring effect of the housing bubble is astonishing to behold.

Just in the past week, two of the most financially literate people I know have told me in voices filled with regret that, after looking at a lot of apartments for sale, they finally just went ahead and rented somewhere new instead.

Of course I told them that they were doing exactly the right thing, but I know that they didn’t believe me.

Both of them understand the mechanics of the mortgage market, and are clearly capable of understanding that if you can make lots of money by buying a house when interest rates are high and falling, then you must be able to lose lots of money by buying a house when interest rates are low and rising, as they are right now. Both of them understand that there’s only one buyer of new mortgages in the U.S. right now, and that without such artificial government support, prices would be a lot lower than they are. Both of them understand that if it costs a lot more to buy than to rent, that’s a good sign we’re still in something of a bubble. Neither of them would be remotely surprised by this graph.


And yet. The psychological reasons for buying a home are so strong — the nesting instinct, the idea that you’re not at the mercy of a landlord, the feeling that paying rent is “throwing money away” in a way that paying mortgage interest or monthly maintenance fees is not — that people simply delude themselves into believing that homeownership in general is (a) an investment, when it isn’t; is (b) a good investment, when it isn’t; and is (c) a good idea even now, when rents are cheap and the downside in the housing market is huge.

It’s worth noting, in this context, that the top two reasons to buy a home are that “it means having a good place to raise children and provide them with a good education”; and “you have a physical structure where you and your family feel safe”. Reading between the lines here, I think that what we’re seeing is the effect of rental ghettoes, and the fact that neighborhoods with high levels of homeownership tend to be safer, and have better schools, than neighborhoods which are mostly owned by landlords. That’s a negative aspect of homeownership, in the grand scheme of things, but it’s clearly here to stay: no one’s anticipating a more sensible world where it’s commonplace to be able to rent a house in a good school district.

And so we reach the point at which more than 60% of Americans say that if they were to move they would buy rather than rent; and where more than 60% of the people who will rent still say that they intend to buy at some point in the future. Indeed, more than 50% of renters say they’re going to buy a place in the next three years.

There are signs of cognitive disconnect — there have to be. For instance, despite considering homeownership to be a safe and good investment, Americans often feel that they’re sacrificing financially in order to achieve it:



The safe-investment chart is particularly crazy: buying a home is considered just as safe as putting money into a savings account — and significantly safer than buying government bonds, despite the fact that it’s the single most leveraged investment that most people will ever make.

It’s not impossible to construct a world view which somehow makes all this consistent, but it’s pretty difficult. You have to have great faith in the power of a mortgage to force savings; you have to be very worried about inflation; and you have to believe that homes are a wonderful inflation hedge. And I don’t believe for a minute that most Americans actually have all those beliefs; they just act as though they have all those beliefs. In fact, I know that they don’t: 73% of Americans believe that it’s best to pay off one’s mortgage as soon as you can.

The most fascinating chart in the whole deck, for me, is this one, which comes just after a chart showing that more than 80% of Americans, and even more than 80% of Americans who are underwater on their mortgages, think it’s not OK to stop paying your mortgage.


How can it be that Americans have such a strong opinion about paying their mortgage, but then in such large numbers think that the main reason to do so is just their credit score? It seems extremely odd to me.

My feeling, after going through the survey, is that we’re in for a housing bear market which will last many years, just as the housing bull market did. There will be substantial demand for houses for the foreseeable future, and that — along with government support — is going to prevent further sharp lurches downwards. But ultimately economic fundamentals have to prevail. It’s just going to take a while.


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