It seems that everyone these days, from economists to Wall Street analysts, to talk show pundits, to the average person on the street is speculating on when the economy will recover and get back to “normal.” But what normal are they referring to?
The normal of the past decade has been ever-increasing home prices, enabled by cheap credit, exotic sub-prime mortgage products, little or non-existing underwriting standards and a broad assumption that housing values can only go up. This boom turned the typical house into an ATM machine of home equity, which in turn fueled huge increases in consumer spending and the resulting debt. While this was happening, incomes were stagnant and our personal savings rates were very low.
So the bubble has finally burst. House prices have plummeted in every neighborhood, exotic mortgages have for the most part disappeared, mortgage underwriting has tightened and housing has returned to what it has always been: shelter, a sound long-term investment, and not the right choice for everyone. People are saving more and spending less, which is good for the individual household, but evidently bad for an economy that seems to be based on little more than consumer spending.
So, what is the new normal we are hoping to see? In housing, it appears that the answer is the return of the housing bubble. What are we paying attention to?….hoped for increases in home sales, home prices and housing construction starts. All homeowners, me included, want their lost home equity wealth back, but how can that happen? Given past and likely continued income stagnation, the only way to increase affordability is through cheaper credit. And with mortgage rates near record lows, there is little room to decrease further without the return of the poisonous loan products that got us into this mess in the first place.