THE BLOG
09/20/2009 05:12 am ET Updated May 25, 2011

Housing: No Mood for a Recovery

Amid all their talk about a bottom in the housing market, the optimists are ignoring some key facts. For one thing, the costs of ownership remain high. Prices relative to incomes and rents are still above long-term averages. Mortgages are increasingly hard to come by, despite all the taxpayer assistance lenders have received. Inventories are nearly double what they were earlier this decade, a quarter of existing homeowners owe more than their properties are worth, and foreclosures continue to rise sharply.

But it isn't just the obvious or most pressing concerns that undermine prospects for a sustained recovery. Even if millions of Americans suddenly had the wherewithal to acquire a new or bigger home, or were simply content to hang on to what they've got, many of the critical factors that feed longer-term booms are fading away. More specifically, people are rethinking what has been a key facet of the American Dream: owning one's own home.

One reason for the change in attitudes is "the new frugality." While it is not unusual to see consumers tightening belts and holding off on expensive purchases during a downturn, the evidence this time around suggests we are seeing a secular shift in buying behavior. Suddenly, fewer Americans feel compelled to keep up with the Joneses or to follow in the footsteps of those before them. Indeed, an April 2009 Gallup survey confirmed as much.

All in all, 51 percent of Americans project that they are going to settle into a new, normal pattern relating to either spending or saving. Within this universe, a group of significant interest is those who say they are going to be not only spending less in the years ahead but also saving more -- behaviors that would mark them as true exemplars of the 'new frugality.

But it isn't just spending habits that are undergoing a sea change. The bursting of three major bubbles during the past decade or so -- two in the stock market and one in real estate -- have driven home the point that traditional havens for wealth are risky propositions. At the margin or, perhaps, more broadly, Americans are becoming less comfortable with the notion of putting their principal at risk, especially when there is borrowed money involved. Instead of thinking about gains, they are worried about losses -- a turnabout that some call a "secular risk aversion."

A recent story in the San Francisco Chronicle, ""More Share Space to Shave Costs in Recession," points to another development that could, and probably will, temper the urge to own. The article details the scramble by individuals, couples, and families to cope with the downturn by cohabiting with others. Although short-term financial pressures have been the key driver until now, many will find the benefits of sharing hard to resist. Eventually, such arrangements will be seen by no small number of Americans, especially those at the bottom of the economic -- and property -- ladder, as a viable alternative that leaves more in the kitty for other things.

Demographic factors will also boost the attractiveness of renting relative to owning. A post at Calculated Risk, "Research on Homeownership Rate through 2030," points to research by Professor Arthur C. Nelson, Director of the Metropolitan Research Center at the University of Utah, which concludes that a shift towards a "new urbanity" and away from suburbs will foster a decline in the homeownership rate. The author also argues that a growing number of baby-boomers will eventually repeat history and decide that renting is an attractive option during their golden years.

Lending further support to a change in attitudes about living arrangements is the current administration's plans to abandon George W. Bush's vision of an ownership society. According to the Boston Globe, President Obama is proposing to pump $5.25 billion of stimulus money into creating tens of thousands of federally subsidized rental units in U.S. cities. While there's no doubt that public policymaking can have unintended consequences -- government-sponsored disasters like Fannie Mae are a case in point -- the implications for the housing market are hard to miss.

One factor that plays a role in all trends, of course, is the seemingly irrational but innate human desire to follow the herd. But here again, the prognosis is poor as far as rising house prices go. Already, continuing poor fundamentals and four years of falling prices have had a corrosive effect on popular sentiment and have undermined the conventional wisdom about the benefits of investing in real estate. The longer it goes on, the more people will lose faith, and the less likely they'll be around to help foment a sustainable recovery.

In the end, it took nirvana-like economic conditions, a lopsided policy focus, a relentless drumbeat of positive reinforcement, and an accumulation of days, months, and years before homeownership became the mantra of long-term prosperity. Given how things look now, the pendulum swing back in the other direction almost certainly has a long, long way to go.