Interesting Analysis Why Falling House Prices is Good

According to this article in Time.com by Michael Kinsley, the end of the real estate bubble is good for practical reasons. He mentioned that the country is happier when real estate prices are going up, since most people own their homes.  However, it is healthier when the prices are going down, especially for the young people who are buying their first home. 

He classified the housing market into three categories: a) most young folks buying their first home b) some at various stages of midlife who owns a home; who will or plan to upgrade to a bigger home someday and lastly, c) mostly older people who are trying to sell and downsize.

Among the three groups, he advised that the only clear beneficiary of the rising house prices are the older people.  It is a struggle for first home buyers when the house prices are increasing.  The mostly middle-aged group will only spend whatever increase in their house value, to the high price of the home they will upgrade too.  Meanwhile, he argued that it’s not a tragedy for the older people to lose part of the increase in their home values.  On average, they benefited the most from the spectacular rise of real estate prices over their entire adult lives.

It is an interesting analysis why the fall in real estate prices is good.  I agree that the older generation were the real benefactors of the housing boom and the greatest casualties are the mostly younger people who recently bought in the housing boom.  At the present market condition where house prices are falling, most older people only faced a decline in equity of their house values.  Meanwhile, the younger generation are still struggling to buy at today’s prices and for those who recently bought; some are facing foreclosure or negative equity due to the high prices they paid for their house.

He also noted that people have long been fantasizing about the increase in their house prices.

"All these rising house values added trillions to our sense of national wealth, but it is an illusion.  If everybody, or even a fraction of everybody, tried to cash in on this rising value, prices would collapse, and the value would disappear…Economists predicted for years that something like this would happen as the boomer generation aged."

Michael Kinsley measured the value of the house as a place to live and base on its ability to generate a rental income.  He was skeptical that the rent rise was no way near the increase in house values of 20% to 40% over the past few years.  Thus, the dramatic increase in house values is not justifiable.

However, the value of the house cannot really be compared to its possible rental income. It is an important consideration for investors, but for end-users it is of no value.  The value of a home is usually dictated by the demand and influenced by the location, availability of jobs, infrastructure and other facilities important to a buyer.  Scarcity of land and the overcrowded cities have forced prices to unreasonably go up.  It is also important to take note that there were more infrastructures built in the last decade or so more than ever before. These, coupled with the growing population were contributing factors to the increase in home values.

However, what makes the house prices inflated is because the salary or income of most people are not growing in the same rate as the increase in house prices.  Housing affordability became a problem.  It is hard to sustain the increase in house prices when majority of the people cannot afford them anymore.

How about you, how does the current real estate market affect you?  Do you agree that falling house prices are good?