Financial Watch

In the past couple years whenever Financial Watch has discussed the state of the housing market, we’ve always focused our discussions around a collapsing bubble. We’re not going to completely move away from that here, but will also include our thoughts on where opportunities exist for above trend appreciation in the long run. First off, before housing resumes appreciating on a nationwide basis the market is going to move significantly to the downside. At the present a record number of homes are for sale. Lots has been made about problems in the subprime market, however its impact has not arrived. Based on the statistics we will see the first true wave of foreclosures this coming winter. By many accounts $500 billion of mortgages will reset to higher rates in the back half of 2007. With even tighter lending standards arriving next year, it will take at least another couple years to work off the excesses in the housing market. By our predictions, Financial Watch expects to see the “housing recession” last until 2011.

For all the false optimism being provided recently by the real estate community there is one thing that rings true: local markets are the most important factor in determining the value of a home. Something that is rarely discussed in respects to the housing market is change occurring among first time buyers. For the first time in many years the population pool that makes up the bulk of the first time buyers is smaller than its preceding generation. This trend will last for about the next decade until “Generation Y” reaches its entry into the housing market. It is likely that the only local markets that will beat inflation during this transition period are those with strongly growing populations, such as Atlanta, Charlotte, and Dallas.

At the same time that the market is transitioning from the “baby boom” generation to their children, Financial Watch expects to see a generational gap occur in housing preferences. Suburban McMansions isolated from the community do not hold the appeal that they did for the “baby boom generation”. A sense of community that did not exist in recent years will become ever more important to the next generation of homeowners. We’ve seen evidence in this in the growing popularity of condominium and live-work-play communities. A second trend that will take hold is an expectation for homes to be high-tech. Generation Y will expect to be able to start cooking dinner or adjust the temperature at home prior to leaving the office to head home. In coming years, homeowners will need to make significant investments to make their homes marketable prior to selling. No longer will $10,000 investments in granite countertops and hardwood floors be sufficient.

The final trend and most important is a shift from the suburbs back into the city. A lack of investment in infrastructure has caused commutes to become unbearable. Additionally, Financial Watch expects that $3 gasoline will be considered “the good old days” in coming years. The growth we’re seeing overseas and continued devaluation of the dollar will only cause gas prices to move higher until consumers adjust their habits. Prior to the “baby boom” generation the poor were left to fend for themselves in what became the suburbs. In cities across the country we are seeing the poor pushed back out into the suburbs to make room for infill development for the upper-middle class. Permanently high gas prices will only further accelerate the trend toward in-town growth. While suburban communities struggle to realize real price appreciation, we’re going to see substantial wealth accumulation in the cities.