In the March issue of Themes on the Economy®, Chief Economist Diane Swonk assesses the U.S. housing market's prospects for recovery. The good news is that there are opportunities for investors in apartment construction through REITS and in single-family homes, which can be renovated and rented out. The bad news is that more individuals and families will be renting apartments and houses, foregoing the American dream of owning their own homes, because qualifying for a mortgage has become difficult even for "credit-worthy" applicants, despite record affordability with home prices expected to drop two to four percent in 2012.
For more details, read this month's issue or watch a video presentation.
- Our chief economist notes that, in a recent television interview, "Billionaire investor Warren Buffett argued that the opportunities in the housing market are greater than those in the broader equity market." Diane Swonk explains that, "The marginal cost of home ownership has dipped below rents, which has created an opportunity for investors who are willing to be landlords."
- "The demand for single-family home rentals, in particular, has accelerated because those who can't qualify for a mortgage, or are afraid to buy, still want the amenities associated with living in a house instead of an apartment: a neighborhood, schools and a yard for their kids and dogs to play in," writes Swonk in her March newsletter.
- Unfortunately, the multiplier effects from renting add less value to the economy overall, since renters don't spend nearly as much as owners do. "It's hard to justify big purchases of furniture and window treatments when you don't know how long you will be living in a space," Swonk observes. The same is true for the value of renovations on rental properties. "The returns from installing top-of-the-line appliances and fixtures are much smaller than they were when homes were selling to flippers; renters also have a habit of being harder on their properties than buyers."
Housing's contribution to growth this year will be the largest since 2005, but that's coming from a very low base. "The result is a housing market that continues to recover, but remains subdued relative to historic norms," Diane Swonk concludes. For more details, see the March issue of Themes on the Economy®.Archived issues can be found at mesirowfinancial.com.
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