It’s an unsettling time to be shopping for a home. Home values have yet to stabilize in three-quarters of U.S. metropolitan areas. Alarm about so-called robo-signing of foreclosure paperwork has raised fundamental questions about who owns a property’s title. And, while unlikely, two bipartisan commissions have suggested capping or killing the previously sacrosanct tax deductibility of mortgage interest.
As a result, home shoppers are being forced to accept a more traditional view of a real estate purchase: seeing their new home more as a savings account than as an investment. That represents a switch from how many owners thought during the go-go years of surging home prices and easy money, says Stan Humphries, chief economist of real estate information and listings website Zillow. “It’s essentially a forced savings plan, putting aside a percentage of your income into a savings account that is a non-depreciating asset in typical times,” he says.
Of course, that’s not necessarily a bad thing. From the 1950s through the mid-1990s, home values appreciated 2 percent to 4 percent a year, on average, just beating the rate of inflation. The challenge is that Humphries also thinks home values won’t bottom nationally until June 2011 at the earliest. Even when home values bottom out, Humphries expects an L-shaped bottom. His grim outlook is based on the fact that 23.2 percent of single-family homes across the U.S. had negative equity in the third quarter—which means high foreclosure rates will likely persist, while underlying demand for housing remains weaker due to high unemployment. The Obama Administration doesn’t expect unemployment to return to a normal range, below 6 percent, until 2015, according to the Office of Management and Budget’s mid-session review released in July.
Prospective home buyers are happy now if their purchase simply holds its value, says Patrick “Bud” O’Hagan, a broker at Terry O’Connor Realtors in Allendale, N.J. Buyers “want to make sure that a year or two from now the house is still worth more than what their mortgage is,” says O’Hagan. “They’re looking at what happened to houses bought two years ago that are under water.”
Charles Moore, owner of McGuire Real Estate in San Francisco and a third-generation broker, sees the psychological reset among prospective home buyers as a return to attitudes that prevailed before the 1970s, when inflation drove up home prices in California and other hot markets. He doesn’t fault people for hesitating to jump in now; he sees them as simply exercising all the diligence that home buyers largely abandoned earlier in the decade.
“Not only am I not overly alarmed by it, but in a way I’d say this was necessary for the market to adjust from this bubble effect to [more realistic] value,” Moore says. “‘Ozzie and Harriet’ buyers didn’t expect any return on investment.”