The Housing Revolution: From Speculative Investment to Low-Cost Shelter

A great article outlining the housing cycle, where we are right now and where we are going.

The Housing Revolution: From Speculative Investment to Low-Cost Shelter
August 28, 2008

The revolution unfolding in U.S. housing will shift the perception of home ownership as a store of investment/speculative value to low-cost shelter. Some will say this is a horrible devolution, others a much-needed evolution; perhaps it is another cycle based on the larger credit-expansion/contraction cycle:

The key feature of housing as investment or speculation is that it depends totally on cheap, readily available lending to sustain prices. Once cheap, readily borrowed money dries up, so does the pool of potential buyers. When sellers far outnumber buyers, prices fall–and as credit shrinks, then the price eventually falls to its cash value, i.e. what someone is willing to pay in cash for the dwelling.

The salient feature of housing on the upswing half of the cycle is that the entire cost structure becomes bloated. When prices are rising by 10% or more in a short period of time, the cost of labor and materials is sloughed off–the owners’ eyes are glued to the prospect of quick profit.

Even those who are “investing for the long-term” focus not on rising costs but on the “value added” by unnecessary “improvements” such as granite countertops, lavish bathrooms, “bonus rooms,” etc. The perceived “value” is not so much the actual advantages of the improvement–let’s face it, granite doesn’t make you a better cook or even enable faster cleanup–but on the increase in selling price the improvement is supposed to yield. In the upswing, “home” magazines proliferate as do articles about “which projects add more value.” Housing is perceived as a store of appreciating value, and those who benefit from this perception relentlessly propagandize this perspective in the mainstream media.

Excerpt, read it all here: