It seems that a housing recovery is the key to reviving the nation's economy, at least according to the media and business experts. The past ten years have shown evidence to the contrary, and in order to get the country back on track, we need to realize the causes of the housing market's crash.
According to one survey, home prices fell just above four percent in the first quarter, spurring on more pessimism about the market's recovery. After falling for eight consecutive months, prices are now down to 2002 levels.
It's not easy not to panic amid dips such as these. However, the problem is that too many homeowners have come to view their homes as an asset that can be used for things such as retirement or simply to be sold at a profit, versus what its main purpose truly is-a place to live.
Americans fueled the housing bubble by seeing homes as an investment, and the process was made much simpler by subsidies and ease of credit. The bubble was so vast that even after four years prices still have not normalized.
Since the market began to decline in '07, the federal government has tried to stabilize prices by means of everything from foreclosure mitigation to home buyer tax credits. The end result, thus far, has been to prolong the recession and pass the bill for some citizens on to others. Critics and supporters alike have bemoaned government involvement, which speaks ill of the underlying and organic health of the real estate market.
Although the decline in prices would have been more dramatic without the government's efforts, the recovery would have occurred sooner and be well along by now.
The continuing drop in prices is due to too much housing stock. Though it may be painful, excess stock needs to be cleared, foreclosures must be processed and homes need to be resold so that prices can finally find the bottom.
One benefit of lower prices is that young families and renters are finding homes affordable. Currently, more than 70% of homes are affordable by median earning families.
Housing, of course, is a large portion of the nation's economy, yet it needs to shrink to a proportionate level of the country's wealth based on population, income, and growth. The economy will thrive when it is built on capital investment in plants and equipment, innovation and businesses. Investment is the answer, not housing.
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