Saturday, March 27, 2010

Housing and the "New Economy"

Housing isn't a topic that I normally cover, but there's a seismic shift happening in the housing market that hasn't gotten a lot of attention. We all know that the U.S. housing market is still a wreck, and it's going to take years to recover. The housing market as we knew it until a couple of years ago was really born at the end of World War II, when millions of GIs came back from Europe and the Pacific and needed places to live. Bill Levitt's Levittown and similar developments were the beginning of the suburban movement and the goal of universal home ownership. Before the war, it was common to live in apartments or rented homes in major cities; after the war, the goal was to move out of the city and own your own home.

Concurrent with the suburban home ownership movement was lifetime employment--the goal (and reality) for most people was that they joined a company right out of high school or college and stayed there for most of their careers. It was safe to buy a home, because unless you were transferred, you were going to stay in the same place for many years.

Flash forward to today: Lifetime employment is only a distant memory, companies are relying on temporary workers, contractors and consultants to do work that was formerly done by employees, and three years is a long time to work for a single company. The U.S. workforce is increasingly temporary and transient. In this economy, owning a home decreases your flexibility. Years ago, companies would assist employees with selling their homes in one market and buying another one when they have to move, but that assistance is increasingly rare.There's no relocation assistance for contract or temporary workers. In addition, the days of infinite home price appreciation are over, as the millions of homeowners whose mortgages are "underwater" can attest.

So what does all this mean? In the long run, home prices will recover, although they'll never fully recover in some markets. However, the transient nature of work is a permanent structural change. We're never going back to lifetime employment. One outcome is that far more people will choose to rent rather than own. The drive to live in a single-family house won't go away, but a lot of the existing stock of homes will go from owner-occupied to owned for rental. That in turn will affect how homes are built, furnished and maintained. People who own rental homes will tell you that renters can do a lot of damage, so this new generation of rental homes will need to be more difficult to damage and both easier and cheaper to repair.

We may also see a shift away from the suburbs and back to living in cities, near work. The suburb of Chicago that I live in could best be descrbed as bucolic; it has a lot of benefits, but convenient access to work and public transit isn't among them. The movement of workers closer to their jobs, or to where they can get to a lot of different jobs, is inevitable.

So, home ownership is likely to shift from a majority of owner-occupiers to landlords owning and renting out multiple homes, and the demand for multi-unit housing in major cities is likely to increase. In both cases, however, the price and terms of rentals have to conform to the needs and expectations of the new transient workforce. Housing that's too expensive for the value offered, or that demands longer leases than tenants are able to commit to, will remain empty.

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