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A recent survey of bank risk managers indicates that “Home prices are unlikely to recover before 2020 and mortgage defaults will persist for years…”

It seems that the bad news for housing is that prices won’t go up much for years to come. But from a fundamental standpoint, this is exactly what the housing market needs. An opportunity to stabilize by finally becoming affordable for median income buyers. One of the primary reasons for the housing collapse was that housing prices grew so much that they became unaffordable for the borrower.

Another “fly in the ointment” is unemployment. Since 2008, job losses and reductions in working hours have eliminated or reduced the income of millions of homeowners and would-be home buyers. But an even bigger fundamental characteristic of the market is that the average income of the average home buyer has not been growing at a pace that could keep up with the increases in housing prices that took place between 1996 and 2006.

By 2006 growth in foreclosure activity was providing early warning signals that there was a problem. The “crack in the foundation” was affordability, or actually the lack of it. As the housing boom went on, Las Vegas, Atlanta, Phoenix, Miami, Seattle, and other major cities had seen huge growth in housing prices and property taxes, but little to no real growth in average income levels. Borrowers were borrowing to buy a house, then borrowing the “equity” in the home itself. When the cost got higher than the income, it was just a matter of time.

Given that real income levels have only grown around 10% since the 1970’s, the fundamental issue is that housing prices can only be sustained at the income level for a given area. So, housing prices simply have to fall back to the average income level. The data show that we are there now, so, fundamentally, we are pretty much at “the bottom” of the housing market. In some areas, we’ll see price growth, where incomes exist to support that growth, and in some areas where unemployment is most persistent, housing prices will continue a slow erosion until they become affordable for the local population.

While the real estate industry that earns commissions has solid motivation for wanting housing prices and loan amounts to rise, they simply can’t rise faster than the local income levels will allow. It might be time to consider some “fee-based” brokerage models in real estate and lending.

From my point of view, the lower prices are good news, to the extent that this is what we must have to revive the housing market. As a licensed agent and real estate investor, I’ve lived both sides of the housing boom. I’d rather have stability instead of volatile boom and bust cycles.

The unemployment problem is a huge challenge, as it’s a combination of productive jobs lost to other countries, and the increasing pace of change, which is making it difficult for older workers to keep up. Until this problem works through the system, a process likely to take years, we’ll see limited growth in the demand for housing. Indeed, new household formation has declined significantly in recent years. You can try to spin that towards pent-up demand for housing in the near future, but it’s more complicated than just the idea that loosening credit standards will suddenly unleash a flood of new home buyers.

I believe that all home buyers are real estate investors, because no one ever buys a home with the intention of losing money. And with prices this low, it’s finally reasonable to believe that an investment in housing today is an investment that will pay off in the long run because mortgage payments are easier to pay and landlords can realize a positive cash flow.

We may see short term fluctuations, but if home prices fall much farther, it won’t be due to the housing crisis, it will be caused by a weakened U.S. economy that is no longer producing a middle class with rising incomes.