JEFFREY BROWN: On the surface, today’s housing news looked pretty good. It came from a closely watched report on property values known as the Case-Shiller index. The survey found home prices rose in July for the fourth straight month. In all, 12 out of 20 cities reported gains, while seven were down. One was unchanged.
But that was partly because home sales were boosted by a federal tax credit that has since expired. President Obama addressed the housing issue today. Speaking in Albuquerque, New Mexico, he urged potential buyers to be prudent.
U.S. PRESIDENT BARACK OBAMA: If you want a house you got to save for a while. You got to wait until you have 20 percent down. You should go for a mortgage that you know you can afford.
You’ve got to — there shouldn’t be any surprises out there, right? That kind of traditional thinking about saving and thinking about the house not as something that is always going up 20 percent every year and you’re going to flip and take out home equity loans and all that — we’ve got to have a different attitude, which reflects what you talked about, more of an attitude that this is your home. This is not just a way to make quick money.
JEFFREY BROWN: And for more, we turn to Karl Case, who helped develop the Case-Shiller index of home prices. He’s professor emeritus of economics at Wellesley College, and John Hough, columnist and associate editor for “SmartMoney” magazine.
Karl Case, what I think people want to know is whether home prices have hit bottom. What do the latest numbers suggest?
KARL CASE, economics professor, Wellesley College: Well, there’s mixed evidence. You have to go back and look at a little history first. We had a big, huge run-up in house prices starting in about the year 2000. And it peaked in 2005 and 2006. And since that time, they have been falling like a rock, until about a year ago. And about a year ago, they perked up. And it happened to coincide with the enactment of the tax credit and the lower, very low interest rates that were caused by — in part by the Fed buying up mortgage-backed securities.
So, now it’s — you have to try to sort out what is going on. Is it stopping? Actually, we had a little pause. Housing prices have stopped falling now — have stopped falling. And it’s hard to know exactly whether they’re going to continue to fall or resume their — stay up.
I think that we have reached a bottom. I’m one of the wildest optimists in the world, having said that. But I think there’s good reasons why we have hit bottom, although there are a lot of worries left.
JEFFREY BROWN: Well, what — quickly, tick off some of those factors that give you some reason for optimism, because the recent home sales were not — recent home sales were not very good.
KARL CASE: No, the home figures that — home sales figures the first month out were down. But if you take a look at a house today, it’s 33 percent lower on average in price than it was five years ago, four years ago. In addition to that, mortgage rates are at 4.1 percent. And if you think of it as a consumer durable good, it’s got a yield or a benefit that accrues to you from owning it that basically is tax-free. And it’s about 6 percent.
So if you look at it from the standpoint of a buyer, ignoring all the periphery, and understanding that it doesn’t take a lot of people to move the market — I mean, we sell about 5 percent of the stock in a given year. You don’t have to value all of it. You need enough people who are optimistic to look at the environment and make a move. And I think that’s beginning to happen.
JEFFREY BROWN: And, Jack Hough, that was a fairly positive view of things. Plenty of people see things staying or getting even worse. How fragile do you think things are?
JACK HOUGH, “SmartMoney”: Well, I will agree that the worst of the price plunge is over. I mean, how could it not be?
But I think that we could easily be in for a long period, maybe a 10-year period, of disappointing returns. I’m talking about prices that lag behind the rate of inflation. You know, we humans tend to have very short memories when it comes to our money and our investments.
And I think, as the president indicated a little while ago, that people are going to think, if house prices are rising gradually now, maybe we’re getting back to these 10 percent yearly gains, 20 percent yearly gains, and maybe it’s time now to go all in on a giant house and try to cash in.
And we need to remember what the normal return for the single-family housing market looks like. And what it looks like is the rate of inflation. How could it not? Inflation is almost by definition a rise in the price of ordinary goods. And what is a house, if not an ordinary good? It’s sticks and cement and metal. And it doesn’t sit up nights thinking about ways to make itself more valuable.
It just sort of sits. And, so, houses tend to, you know, correspond with the rate of inflation. I think there are still pockets around the country where house prices are relatively high. So, I think we could easily see a long period where prices, they don’t plunge, but they just slightly lag behind inflation.
JEFFREY BROWN: Well, now, I want to ask both of you this, because the experience of the last few months has led to a lot of questions about the value of homeownership.
Karl Case, I will start with you, questions now about, people ask themselves, is it better to still buy or to rent? What are the factors that should go into that?
KARL CASE: Well, one way of thinking about it is to think of a house as a durable good to begin with, like a car. First of all, you don’t worry a lot if your car declines in value. You know it is going to.
The biggest part of the yield that people have to get used to thinking about is that you live in it rent-free. And that’s non-taxable. And it represents about a 6 percent yield. And in today’s environment, with the 1 percent on what you put it in that’s safe, it’s not a bad — it’s not a bad return.
So I just think, if you start adding in some of those factors, it comes out a little bit differently. Now, also, if your house falls in value, but you’re living in an area where it falls somewhat in real value, then if you’re going to live in it a long period of time, you get the continuous flow of dividend at about 6 percent, and you’re still able to purchase the next house in the chain as you go along. So, it’s not such a bad deal.
JEFFREY BROWN: Well, Jack Hough, you have written recently in praise of renting. Now, what’s the argument there? Now, we ought to say that these things, I suppose, depend on where one lives and how one lives, but explain the case for renting today.
JACK HOUGH: Absolutely. You know, if — there’s nothing wrong with buying a nice house, any more than there’s nothing wrong with buying a nice car. It’s just that there’s too much talk of housing — single-family housing as an investment.
If the three of us decided to go in together on a real estate investment and I said, gentlemen, I have a plan, we will build a 3,000-square-foot house that will fit only one family, you would say to me, that’s not a very good plan. We should build a building where we can maximize the amount of rent that flows through it, and have people with just as much living space as they need.
The single-family house in America is almost a poor investment by design. Go back 30 years, and you had houses that were 1,700 square feet. Today, they have come down over the past year a little bit, but they’re still 2,400 square feet, even though the size of the average American family has gotten smaller over that time.
Clearly, houses today are mostly consumption. They’re not designed for investment. So, there’s nothing wrong with homeownership. Just don’t go into it thinking you’re going to get rich. Go into it because you have a lot of money and you want something nice.
JEFFREY BROWN: Well, Karl Case, what do you think about that?
KARL CASE: I agree with that. And there are negative surprises that happen when you buy a home, too. I mean, you don’t realize that it’s like running a small business. Many of the properties that we sold for exorbitant prices over the last three or four years were in low-income neighborhoods where people got access to credit. And they paid unbelievable prices for these houses. And they weren’t in very good shape.
So, if you can’t afford it, and you don’t anticipate all that goes into maintaining it properly, then you should be a renter. Also, if you’re only going to be around for a short period of time where you’re living, it’s always a bad — I think it’s always a bad time to buy, because you want it to be liquid when you need to move. And it’s not always liquid when you need to move.
JEFFREY BROWN: Well, Jack Hough, the longer-term questions here are — and you have people asking themselves now — is whether the whole notion of homeownership has been oversold, you know, oversold by the government, oversold by our culture through public policies, whether we ought to be rethinking those. Give us a flavor of that argument now.
JACK HOUGH: Yes. Well, I don’t know if homeownership has crossed over the line where it has become a religion or not. I’m not sure what the — the barrier is there, but — but I don’t understand why we have government making such a sales pitch for homeownership.
Why do we give such tax breaks and such incentives to people who own the box they live in, and take the money out of the pockets of people who rent the box they live in? Why are we telling Americans that single-family housing is such a great investment? If it’s such a great investment, shouldn’t they see that on their own?
So, I think it’s time for a close examination of many of these programs we have. Certainly, the $8,000 giveaway that expired was a bad idea. But I think, going forward, we can reconsider, not for existing homeowners who have sort of bought on these terms, but for new buyers, why do we give a mortgage interest deduction, why do we give a cash reward for people who buy their homes with borrowed money, and not for people who pay cash and people who rent?
JEFFREY BROWN: All right. All right. I just want to — we just have a minute here. So, Karl Case, I just want to — you want to make a case still for the continued value of homeownership?
KARL CASE: Well, I think making a case for continued value of homeownership is different than looking for a huge federal handout.
I mean, we pour enormous amounts, hundreds of billions of dollars, into housing, as a result, I think, of very effective lobbying over the years, and the fact that people made enormous sums of money living in their houses.
So, I do think we need to reexamine the way we give subsidies. And rental housing is an important component of the stock, simply because ownership is not really right for everybody.
JEFFREY BROWN: All right.
KARL CASE: But it’s — it’s — OK.
JEFFREY BROWN: OK. I’m sorry. Did you want to finish?
KARL CASE: No, that’s all right.
JEFFREY BROWN: OK. Karl Case and…
JACK HOUGH: I would just say, keep in mind that, when you buy this big, giant house with a small down payment, that you don’t pay your property taxes on the money you have put up for the deal. You pay it on the total purchase price of the house.
So, that’s a big consideration by policy-makers when it comes to pushing the benefits of homeownership. There are benefits of tax revenue.
JEFFREY BROWN: OK. Jack Hough and Karl Case, thank you both very much.
KARL CASE: Pleasure.
JACK HOUGH: Thank you.