A Dream House After All

First, the bad news. What has happened in the housing markets since 2005 is a catastrophe that may take years for our economy to recover from.

Anyone who believed that home prices never fall has learned a tough lesson. The Case-Shiller price indexes released on Tuesday suggest that since their national peak in 2006, home prices have fallen by 29 percent. Some areas of course look better than others. Las Vegas is down 57 percent from its peak and Phoenix is down 51 percent. On the other hand, Boston is down just 13.5 percent and Dallas only 4.2 percent.

The effect on household wealth has been huge. Data maintained by the Federal Reserve show that the value of residential real estate directly held by households fell to $16.5 trillion in the first quarter of 2010, down from $22.9 trillion in 2006. It has yet to be determined who will end up bearing those losses. The decline in wealth has substantially reduced consumption, stifling the economy.

Depressing, yes — but the end of a dream? Not exactly. I have never quite understood what the American dream really means when it comes to housing. For some people, it means having a solid and fairly safe long-term investment that is coupled with the satisfaction of owning the house they live in. That dream is still alive.

Others, however, think the American dream is owning property that appreciates by 30 percent a year, making a house into a vehicle for paying bills. But those kinds of dreams have become nightmares for the millions of foreclosed property owners who have found themselves sliding toward bankruptcy.

But for people with a more realistic version of the American dream, buying a house now can make a lot of sense. Think of it as an investment. The return or yield on that investment comes in two forms. First, it provides what is called “net imputed rent from owner-occupied housing.” You live in the house and so it provides you with a real flow of valuable services. This part of the yield is counted as part of national income by the Commerce Department. It is the equivalent of about a 6 percent return on your investment after maintenance and repair, and it is constant over time in real terms. Consider it this way: when Enron went belly up, shareholders ended up with nothing, but when the housing market drops, homeowners still have a house. And this benefit is tax-free.

The second part of the yield on investment in a house is the capital gain you receive if it appreciates and you sell the house. Gains are excluded from taxation if the property is a primary residence and the gain is less than $250,000 for a single filer or $500,000 for a married couple filing jointly.

Consider a few other bonuses of buying a home today. You can deduct the interest you pay on the mortgage. Interest rates are about as low as they can get. And, don’t forget, home prices are down by 30 percent on average from the peak. The mortgage-interest deduction and the tax-free income from housing cost the government at least $200 billion a year.

During this recession the government has been doing even more on behalf of the American dream. It offered a tax credit of $8,000 to first-time buyers, and eventually $6,500 to other qualified buyers. Not only did the Federal Reserve continue to keep the short-term interest rates it sets at essentially zero, it purchased $1.4 trillion in mortgage-backed securities so that lenders could keep mortgage rates low.

Do the math. Four years ago, the monthly payment on a $300,000 house with 20 percent down and a mortgage rate of about 6.6 percent was $1,533. Today that $300,000 house would sell for $213,000 and a 30-year fixed-rate mortgage with 20 percent down would carry a rate of about 4.2 percent and a monthly payment of $833. In addition, the down payment would be $42,600 instead of $60,000.

IN fact, until about two months ago, it looked as if potential buyers were beginning to understand all these advantages and that the market was turning around. By May 2009, housing prices had stopped falling in a majority of the metropolitan areas surveyed in the Case-Shiller index. Sales were also up. In 2008, 4.9 million existing homes were sold. In 2009, the figure rose to 5.2 million; last November, sales hit an annual rate of 6.5 million (a boom-time number). Even new construction showed a pulse.

So, what happened to kill the momentum? For one thing, the first-time buyer credit expired at the end of April. And some longer-term demographic changes may also be affecting the housing market.

Source: New York Times