Ten rules to live by

October 7, 2009
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At the recent PAR Business Meetings, I was honored to be invited to make a presentation. I offered several observations for the changed real estate market. These rules are really judgments or conclusions about the altered housing market environment.dollarsign_house

Here are a few principles for the new world of real estate:

1. The valuation of homes will no longer be a function of the appreciation potential (or growth option) in house prices. We expect an extended period of no price appreciation.

2. In markets where appreciation was a primary selling point, prices have sunk the fastest and declined by the largest percentages. These markets were where speculative fever struck the hardest (e.g., Arizona, California, Nevada and Florida).

3. Mortgage interest deductibility has little, if anything, to do with the returns to owning housing since tax shelter benefits are already capitalized into prices. The opportunity to deduct mortgage interest is likely to have benefitted the initial owners when the tax law was implemented in 1917; subsequent buyers just passed along the premium built into the price.

4. In the next several years, the market for residential real estate will be based primarily on the housing services available to its owners. Housing is all about housing services once again rather than about chasing tax shelter benefits, capital gains and refinancing to free up new equity.

5. Supply constraints on location will remain important. Special locations will continue to be in demand.

6. The decision to purchase a home will be based upon household consumption expectations and needs which are provided by this long-term, depreciating consumer durable. Housing has always been a consumer durable.

7. The real estate business will live on and prosper in this new world since households will continue to spend large portions of their budgets on housing services. The market for housing will remain strong without the inflated financial parameters of the past decade.

8. The speculative fever and over-leveraging of housing budgets, especially by low- and moderate-income households, will largely be a remnant of the past. Easy availability of credit will settle in as  part of the history of the housing bubble.

 9. If inflation and inflationary expectations are low, mortgage rates can be low. If economic growth is limited, mortgage rates can also be low. Historically low mortgage interest rates do not mean housing will be a good investment.

10. Over time, real estate prices will not likely change much but there will still be an active market for both new and existing housing stock. Housing will remain a major sector in the US.

Here are some new rules to live by in today’s dramatically different housing market. As with any major change, there is sure to be winners and losers. It will be interesting to see if these principles lead to success or failure in the days ahead.

About Austin Jaffe, Ph.D.:
Austin Jaffe, Ph.D. is PAR's Consulting Economist from the Smeal College of Business at Penn State University.
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One Response to Ten rules to live by

  1. Ten Rules for the New Real Estate Economy « Business Casual Blog on October 29, 2009 at 12:14 pm

    [...] Jaffe recently outlined ten principles to consider regarding the new real estate market. From his post on the Pennsylvania Association of Realtors’ blog, Just Listed: 1. The valuation of homes [...]

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