The real estate industry must rethink the market fundamentals, the long-held demographic and economic beliefs that experts argued would drive the housing demand into the future.

The world has turned upside down with old truisms now seeming trite.

In January 2003, Inman News convened a conference on the "Housing Bubble," during which some experts promised the boom would continue because of six "market fundamentals." These were the mantra for the industry for more than 10 years:

  • The demographics-as-destiny argument. The expanding U.S. population — immigration — would fuel real estate demand well into the next decade.
  • Low mortgage rates. Cheap credit would keep home loans affordable.
  • Boomer wealth. Prosperity and the rolling over of assets from the Depression generation to the spending generation would continue to ignite home purchases.
  • Consumer confidence. At the 2003 conference, Yale professor Robert Shiller of the Case-Shiller home-price index argued that historic bubbles did not burst until consumers gave up on the asset that prompted their confidence. At the time, real estate enthusiasm was as strong as the morning Starbucks coffee habit.
  • Low unemployment. The argument was that people who are employed buy houses.
  • Unlimited market liquidity. Access to capital seemed unrestrained as Fannie, Freddie and the mortgage-backed securities market was flush with funds.

And finally, homeownership becomes reasonably affordable because wild swings in value even out as liquidity excess is not pushing too many buyers into the market.

In this environment advantages still favor owning over renting, but the new fundamentals translate into a housing market that is significantly smaller.

It is a future based on long-term value, not short-term appreciation, with significantly fewer home sales but a more stable market.

***

What’s your opinion? Leave your comments below or send a letter to the editor.

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