Green Shoots -- Housing Market Version

More Demand Coming Off the Sidelines?

I wouldn't say its a trend, at least not yet, but at my Sunday open house I encountered an encouraging sign for the housing market: a couple in their late '50's - early '60's, now renters, contemplating buying my client's (very nice) townhome.

Their credit was (more than) fine, they both had jobs, and they weren't particularly rattled about the economy.

Having rented for the last 3 years, they had no particular beef with their landlord -- at least beyond the usual, garden variety inattention. But their rent was going up for the second time in three years, and their location was noisy and crowded rather than private and residential.

Too, the now-renters wanted to plant flowers and a garden.

Even if their rented townhome had the space, it wouldn't feel the same.

Just as no one washes a rental car, few renters put a lot of TLC into improving their rentals.

vs. 2006

Contrast the aforementioned, ultra-conservative profile with what Realtors were seeing just three years ago: waves of renters, many with dubious (or no) credit, wanting in on the housing boom.

In the stock market, it's a strong bullish indicator when people are defensive, and there's a lot of cash on the sidelines.

At least in theory, the pool of cash represents buying fuel for another upswing.

Similarly, a large pool of former owners-now renters bodes well for future housing demand.

Big -- and Little -- Ticket Purchases

Recession, Uncertainty Hammer Big-Ticket Purchases

What to know what's selling today? Not big-ticket items.

On a scale of 1-10 (1 is the lowest, 10 is the highest), here is a shorthand -- mine -- for the magnitude of various consumer (and business) purchase decisions. Just like the Richter scale, this scale is logarithmic, kind of (8.0 is a much bigger purchase than 6.0).

Anything ranked over 3.0 has seen a dramatic slowdown; anything over 6.0 has fallen off a cliff.

A. Consumers

Basic Necessities; "Sundries" (toothpaste, gallon of milk, candy bar): 1.0
First-run movie: 1.5
Nice Restaurant: 2.0
Tank of gas: 2.0
Clothes: 2.0 - 3.0
Appliances: 3.0 -4.0
Furniture: 3.0-5.0
Used car: 4.0-6.0
New car : 5.0 - 7.0
House: 10.0

B. Business

Capital equipment (commercial plane, agricultural combine, bulldozer): 10+
Publicly traded company (buyout): 10+++

To my armchair economist's eye, big-ticket purchases have been killed by: 1) economic uncertainty, including job (in)security; 2) financial pressure (and in some cases, hardship), caused by falling housing and stock prices, and rising unemployment; and 3) concern about falling asset prices.

Interestingly, any one of these can chill demand for houses: even people who are relatively flush and feeling confident about the future logically may hesitate to step up and buy if they're convinced housing prices have further to fall. That psychology explains why markets tend to overshoot (a phenomenon also associated with stocks): to coax people out of their defensiveness at market lows, bargains often have to become screaming bargains.

Of course, the companion to wanting to buy is being able to.

Fortunately, the federal government is increasingly focused on steps designed to address that. Those include: a fat tax credit to first-time home Buyers; very cheap mortgage money; and lots of fresh capital ploughed into Fannie Mae and Freddie Mac (which should then "irrigate" the housing market with added liquidity).

Will these steps work? Stay tuned. . .