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The Upside of the Housing Bust

The Upside of the Housing Bust

By Robert Samuelson - May 9, 2011

WASHINGTON -- If you're a 20-something or even younger, your economic future is at best clouded. Your taxes will almost certainly be higher than today's; your public services (schools, police, sanitation, defense, scientific research) will almost certainly be lower. Paying for old people, covering rising health costs, repairing dilapidated roads and servicing government pensions and the huge federal debt will squeeze take-home pay. Is there any hope for economic gains?

Well, yes -- and from a surprising source. Housing. Say what?

Almost everyone considers the housing collapse a disaster, and it is. Since 2007, roughly 8 million homes have gone into foreclosure. Housing prices, according to the widely cited Case-Shiller index, are down about 33 percent from their 2006 peaks. They're still falling, albeit at a slower pace. In some cities (Atlanta, Cleveland, Las Vegas, Detroit, Phoenix), they're at or below 2000 levels. Home sales are stunted, and construction is a quarter of its previous peak. Housing's implosion retards the economic recovery. Aside from unemployed carpenters and real estate agents, there's much unsold lumber, carpet and appliances.

But housing's troubles may have a silver lining. If you're a homeowner, the steep fall in prices is calamitous. But if you're a future buyer, it's a godsend. What we're seeing is a massive wealth transfer from today's older homeowners to tomorrow's younger homeowners. From year-end 2006 to 2010, housing values fell $6.3 trillion, reports the Federal Reserve. Assuming there's no sharp rebound in prices -- a good bet -- that's $6.3 trillion the young won't pay.

Up to a point, the lower home prices merely deflate the artificial "bubble." But there's evidence that the declines transcend that. The National Association of Realtors routinely publishes a housing "affordability" index, which judges the ability of median families to buy the median-price home at prevailing interest rates. By this measure, existing homes are the most affordable since the index started in 1970.

Young buyers "will be able to enter the housing market at bargain prices," argues NAR economist Lawrence Yun. When home prices again rise, increases will parallel income gains, meaning that the relative burden of housing costs will remain roughly stable, Yun says. He expects only modest increases in interest rates. (A one percentage point rise -- say, from 5 percent to 6 percent -- on a $150,000 mortgage boosts the monthly payment about $95.)

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